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United Nations Conference on Trade and Development

World Investment Report 1998
Trends and Determinants

United Nations New York and Geneva, 1998

Note
UNCTAD serves as the focal point within the United Nations Secretariat for all matters related to foreign direct investment and transnational corporations. In the past, the Programme on Transnational Corporations was carried out by the United Nations Centre on Transnational Corporations (1975-1992) and the Transnational Corporations and Management Division of the United Nations Department of Economic and Social Development (1992-1993). In 1993, the Programme was transferred to the United Nations Conference on Trade and Development. UNCTAD seeks to further the understanding of the nature of transnational corporations and their contribution to development and to create an enabling environment for international investment and enterprise development. UNCTAD's work is carried out through intergovernmental deliberations, technical assistance activities, seminars, workshops and conferences. The term “country” as used in this study also refers, as appropriate, to territories or areas; the designations employed and the presentation of the material do not imply the expression of any opinion whatsoever on the part of the Secretariat of the United Nations concerning the legal status of any country, territory, city or area or of its authorities, or concerning the delimitation of its frontiers or boundaries. In addition, the designations of country groups are intended solely for statistical or analytical convenience and do not necessarily express a judgement about the stage of development reached by a particular country or area in the development process. The following symbols have been used in the tables: Two dots (..) indicate that data are not available or are not separately reported. Rows in tables have been omitted in those cases where no data are available for any of the elements in the row; A dash (-) indicates that the item is equal to zero or its value is negligible; A blank in a table indicates that the item is not applicable; A slash (/) between dates representing years, e.g., 1994/95, indicates a financial year; Use of a hyphen (-) between dates representing years, e.g., 1994-1995, signifies the full period involved, including the beginning and end years. Reference to “dollars” ($) means United States dollars, unless otherwise indicated. Annual rates of growth or change, unless otherwise stated, refer to annual compound rates. Details and percentages in tables do not necessarily add to totals because of rounding. The material contained in this study may be freely quoted with appropriate acknowledgement.

UNITED NATIONS PUBLICATION Sales No. E.98.II.D.5 ISBN 92-1-112426-3 Copyright © United Nations, 1998 All rights reserved Manufactured in Switzerland

Preface
The eighth annual World Investment Report is issued at a time when the process of globalization is under close scrutiny. Even as countries continue to forge stronger economic links with one another, in the past year unexpected financial shocks have interrupted the economic progress of a group of previously fast developing countries in Asia. This has provoked renewed interest, especially from a policy perspective, in the modes of internationalization, including through foreign direct investment. The World Investment Report 1998 (WIR98) explores the implications of the Asian financial crisis for foreign direct investment in and from the affected Asian economies. As usual, it provides an analysis of current trends in foreign direct investment and international production by transnational corporations, examining key aspects of the world’s largest transnational corporations, and noting major regulatory changes at the national and international levels. It provides a breakdown of regional FDI trends, and examines specific issues related to the role and impact of foreign direct investment in various parts of the world.

WIR98 also reviews the locational factors that determine the flows of foreign direct investment to host countries, and the evolving nature of those determinants as transnational corporations adjust their strategies to the pressures of increased international competition. Among other issues, it addresses the influence of regional and multilateral frameworks on the location of international production and foreign direct investment flows.
In discussing these trends and issues, WIR98 contributes to an improved understanding of the role of foreign direct investment in the world economy and to the ongoing discussion in all quarters on globalization. It will also help stimulate the debate on financing for development that the General Assembly of the United Nations will consider in 1999.

New York, August 1998 Nations

Kofi A. Annan Secretary-General of the United

Acknowledgements
The World Investment Report 1998 was prepared by a team led by Karl P. Sauvant and comprising Victoria Aranda, Persephone Economou, Wilfried Engelke, Masataka Fujita, Kálmán Kalotay, Padma Mallampally, Ludger Odenthal, Assad Omer, Jörg Weber, James Xiaoning Zhan and Zbigniew Zimny. Specific inputs were received from Bijit Bora, Sew Sam Chan Tung, Anna Joubin-Bret, Mina Dowlatchahi, Gabriele Koehler, Menelea Masin, Anne Miroux, Marko Stanovic and Anh Nga Tran-Nguyen. The work was carried out under the overall direction of Lynn K. Mytelka. Principal research assistance was provided by Mohamed Chiraz Baly, Lizanne Martinez and Bradley Boicourt. Research assistance was provided by Rohan Patel, Katja Weigl, Makameh Bahrami and Paul Baker. A number of interns assisted with the WIR98 at various stages: Maria Giovanna Bosco, Ozavize Lawani, Ju-Young Lee, Bruno Le Feuvre, Jennifer Lynn McDonald, Alain-Christian Pandzou and David Pritchett. The production of the WIR98 was carried out by Jenifer Tacardon, Christiane Defrancisco, Medarde Almario, Florence Hudry, Hélène Dufays, Atsedeweyn Abate and Bartolomeo D’Addario. Graphics were done by Diego Oyarzun-Reyes. It was desktoppublished by Teresita Sabico. The Report was edited by Vishwas Govitrikar and copy-edited by Frederick Glover. Experts from within and outside the United Nations provided inputs for WIR98. Major inputs were received from Thomas L. Brewer, Jaime Crispi, Robert E. Lipsey, Michael Mortimore, Peter Nunnenkamp and Terutomo Ozawa. Inputs were also received from Rakesh Basant, Christian J. Bellak, Alvaro Calderón, Pankaj Chandra, Daniel Chudnovsky, Michel Delapierre, E.S. Dussell Peters, Frank Dutman, Reinaldo Gonçalves, Anabel Gonzalez, Edward M. Graham, Fabrice Hatem, Eduardo Hecker, Katharina Helmstedt, Grazia Ietto-Gillies, Yong-Hwan Lee, Mark Mason, Sheila Page, Nipon Poapongsakorn, Jason Praetorius, Eric D. Ramstetter, Jacques Sasseville, Marjan Svetlicic, Douglas van den Berghe, Rob van Tulder, Lise Weis, Obie G. Whichard, Guoming Xian and Yew Siew Young. A number of experts were consulted on various chapters. Comments were received during various stages of preparation (including expert meetings) from Jamuna Prasad Agarwal, Manuel R. Agosín, Charles Arden-Clarke, Octavio Barros, Atchaka Brimble, Luz Curiel Beaty, Paul Bennell, Michael Blank, Susan C. Borkowski, Dali Bouzoraa, Eva Bursvik, John A. Cantwell, Jenny Cargill, Andrew Cornford, Dieter Ernst, Arghyrios A. Fatouros, Jarko Fidrmuc, Gunnar Fors, John Gara, Michael Gestrin, Jan Huner, Gábor Hunya, J. Jegathesan, Rolf Jungnickel, June-Dong Kim, John M. Kline, Masamichi Kono, Mark Koulen, Sanjaya Lall, Ngo Van Lam, Robert Ley, Nick Mabey, Raymond Mataloni, Klaus E. Meyer, Manuel B. Montes, Peter Muchlinski, Lucia Piscitello, Sylvain Plasschaert, Maryse Robert, Pedro Roffe, Matija Rojec, Alan M. Rugman, Mitsuharu Sawaji, Sara Sievers, Carrie Smith, John M. Stopford, Simon Teitel, Shigeki Tejima, Raymond Vernon, Wee Kee Hwee, Ganeshan Wignaraja and Stephen Young. Numerous officials of central banks, statistical offices, investmentpromotion agencies and other government offices, as well as executives of a number of companies, also contributed to WIR98, especially through the provision of data and other information. The Report benefited from overall advice from John H. Dunning, Senior Economic Adviser.

Contents

Contents
Page Preface ........................................................................................................................................ ii Overview .............................................................................................................................. xvii I. GLOBAL TRENDS ...................................................................................................... 1
A. Overall trends ...................................................................................................................... 1 1. 2. International production ........................................................................................ 1 FDI flows .................................................................................................................. 7 (a) Inflows ........................................................................................................ 12 i. Developed countries and Central and Eastern Europe ............ 12 ii. Developing countries ..................................................................... 13 (b) Outflows ..................................................................................................... 18 Mergers and acquisitions ..................................................................................... 19

3.

B. Inter-firm technology agreements .................................................................................... 23 1. 2. Developed countries ............................................................................................. 24 Developing countries ........................................................................................... 27

Notes .......................................................................................................................................... 31

II.

THE LARGEST TRANSNATIONAL CORPORATIONS ................................. 35 TRANSNATIONAL CORPORATIONS
A. The world’s 100 largest TNCs ....................................................................................... 35 1. 2. B. Highlights .............................................................................................................. 35 Degree of transnationality ................................................................................... 43

The largest TNCs from developing countries ............................................................. 47

Notes .......................................................................................................................................... 54

III.

INVESTMENT POLICY ISSUES .......................................................................... 55
A. Trends ................................................................................................................................ 55 1. 2. B. National policies ................................................................................................... 55 Developments at the international level ............................................................ 59

Double taxation treaties ................................................................................................. 74

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1. 2. 3. The role and characteristics of double taxation treaties .................................. 74 Effects of tax treaties ............................................................................................. 79 The universe of double taxation treaties ........................................................... 83

Notes .......................................................................................................................................... 87

IV. IV.

COUNTRY HOST COUNTRY DETERMINANTS OF FOREIGN DIRECT INVESTMENT ....................................................................... 89
A. The national FDI policy framework ............................................................................. 92 1. 2. B. C. FDI policy as a determinant ................................................................................ 93 The impact of globalization ................................................................................. 97

Business facilitation ........................................................................................................ 99 Economic determinants ................................................................................................ 106 1. Traditional economic determinants .................................................................. 106 a. Natural resources .................................................................................... 106 b. National markets ..................................................................................... 107 c. Other traditional determinants.............................................................. 108 The impact of globalization ............................................................................... 108 a. Simple integration strategies ................................................................. 109 b. Complex integration strategies ............................................................... 111

2.

D.

The impact of international policy frameworks ....................................................... 117 1. 2. Bilateral investment treaties .............................................................................. 117 Regional integration frameworks ..................................................................... 118 a. The impact of regional integration frameworks on FDI determinants ..................................................................................... 120 (i) The policy framework ................................................................ 120 (ii) Economic determinants ............................................................... 121 (iii) Business facilitation ..................................................................... 123 The impact of regional integration frameworks on FDI flows ......... 124

b.

Conclusion ........................................................................................................... 126 3. The potential impact of a possible multilateral framework on investment 128

Notes ........................................................................................................................................ 130

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Page
Annex to chapter IV. An econometric test of market related FDI variables ................. 135

V.

DEVELOPED COUNTRIES ................................................................................... 141
A. B. C. United States .................................................................................................................. 141 Western Europe ............................................................................................................. 153 Japan ............................................................................................................................... 157

Notes ........................................................................................................................................ 161

VI.

AFRICA ...................................................................................................................... 163
A. B. Trends .............................................................................................................................. 163 Recent country success stories .................................................................................... 177 1. 2. Which countries are they? ................................................................................. 177 Why do they perform well? .............................................................................. 180 (a) (b) (c) The policy framework............................................................................. 180 Business facilitation ................................................................................. 183 Economic determinants .......................................................................... 184 i. Resource-seeking investment ..................................................... 185 ii. Market-seeking investment ........................................................ 185 iii. Efficiency-seeking FDI ................................................................. 188

3.

Lessons ................................................................................................................. 189

Notes ........................................................................................................................................ 193

VII.

PACIFIC ASIA AND THE PACIFIC ...................................................................................... 197
A. B. Trends .............................................................................................................................. 197 The financial crisis in Asia and FDI ............................................................................ 208 1. Implications for FDI into the most affected economies ................................. 209 (a) (b) Effects on FDI entry and expansion ...................................................... 209 Effects on TNC operations ..................................................................... 211 i. Export-oriented FDI ..................................................................... 211 ii. Domestic-market-oriented FDI .................................................. 222 Regulatory changes affecting FDI ......................................................... 226

(c)

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2. 3. 4. Implications for outward FDI ........................................................................... 227 Implications for FDI flows into other countries ............................................. 231 Conclusions ......................................................................................................... 236

Notes ........................................................................................................................................ 241

LATIN VIII. LATIN AMERICA AND THE CARIBBEAN ...................................................... 243
A. B. Trends .............................................................................................................................. 243 FDI, exports and the balance of payments ................................................................ 253 1. 2. 3. The export orientation of FDI ........................................................................... 254 Balance-of-payments concerns ......................................................................... 263 Conclusion ........................................................................................................... 268

Notes ........................................................................................................................................ 269

IX.

CENTRAL AND EASTERN EUROPE ................................................................. 271
A. Trends ................................................................................................................................. 271 B. Is Central and Eastern Europe attracting enough foreign direct investment? ..... 279 1. 2. The relative position of the region.................................................................... 279 Strengths and weaknesses ................................................................................. 284

Notes ........................................................................................................................................ 290

References ............................................................................................................................. 293 Annexes ................................................................................................................................. 313
Annex A. Additional text tables .......................................................................................... 314 Annex B. Statistical annex ................................................................................................... 351

Selected UNCTAD publications on Transnational Corporations UNCTAD Transnational and Foreign Direct Investment ......................................................................................... 425 Questionnaire ....................................................................................................................... 429

Boxes
I.1 I.2 I.3 II.1 The volatility of foreign portfolio investment and FDI flows into developing countries ........... 14 Foreign portfolio investment: recent trends ....................................................................................... 17 The Nortel network ............................................................................................................................... 30 The international spread of banking ................................................................................................... 42

Page

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....... 260 Argentina: two cases of investment in the petrochemical industry ................................................ 145 FDI in Mauritius .. restructuring and the Asian crisis: Seagate Technology........ 218 TNCs’ response to the Asian crisis: the case of Honda in Thailand ........................................................................ 283 Investment incentives in the Czech Republic ......... 105 The continuing relevance of traditional determinants ...............................................3 VII................. 212 TNCs.............3 IV...............................................................2 IV......................................... 220 The UNCTAD/ICC global survey ................................................................................................8 V.............................. 12 Capital flows to all developing countries........................................... 233 Policy measures ................2 VI..........3 VIII........................... 265 Outward FDI in Slovenia ............................................7 I....................................................1 VII..3 VII.............................. 220 TNCs’ response to the crisis: the electrical and electronics industry in Malaysia ...................................................................2 IV...................6 IV................................1 IV........... 1996 ....................................... 1980-1997 .......... 1985-1997 ......................................................... 9 FDI flows......................... 168 Africa as a location for market-seeking and efficiency-seeking FDI: the case of the ABC Bücherdienst GmbH in Namibia .........................................................................1 I..2 I.........................................................................................3 I.......................................................................................................................... 93 The process of liberalization of FDI policies .Contents II............................12 VII........7 VII.3 IX........ 187 The Southern Africa Initiative of German Business .............................................................................................. 225 Impact of the Asian financial crisis on Japanese FDI .................................................................4 IV................ 10 FDI inflows as percentage of gross fixed capital formation......................................1 VI...........................................................4 VII......................................................................................................................................................... by type of flow........2 VIII................................... 289 Figures I.............. 142 Indirect FDI .......4 Measurement of transnationality ........................................................................................................9 The degree of internationalization through FDI and through trade.................... 1997-1998 ..........................................13 VII......................... 1994-1996 ....................... 223 Prospects for inward FDI in various industries in the Republic of Korea ................................................2 IX........... 1990-1997 ........................9 VII...........................................2 VII......................................... 280 UNCTAD’s survey of investment-promotion agencies in Central and Eastern Europe ....................................................................................................................5 IV....................................7 IV...........................4 IX.............................................................. .......... 94 Bilateral investment treaties: similarities and differences .............. 1980-1996 .......................... 239 Brazil: the new champion .....6 VII..................................4 I...........8 I...............................................................5 VII............................ 8 FDI inflows......... relative to market size and population......................... 18 The relationship between cross-border M&As and FDI flows............................................ 7 Internationalization through FDI and through trade in selected countries and regions .......... 19 ix ..................................................................................6 I.............. 222 The UNCTAD/ICC global survey: implications for FDI in Asia in the short and medium term ............14 VIII................ 205 M&As and greenfield investment: a comparison .....................................2 VI................. 43 Reviewing FDI in Canada .........11 VII........................... 192 Is the current FDI boom in China over? ...10 VII................. 202 FDI through offset programmes in West Asia .............................. by region......................... 279 How high is the outward FDI stock of the Russian Federation? ..................................1 IX................. 215 Toyota’s response to the Asian crisis: changes in production and exports from Thailand....... 1980-1997 .1 VIII............................. 217 Implications of the financial crisis for foreign affiliates' operations: survey results for Thailand .......................................... 14 FDI outflows by major region............................................................................ by major region..... 1990-1997 ............................................... 102 Ireland’s FDI policy ................................. 248 FDI in the Caribbean Basin and the NAFTA challenge .................................. 259 Trade by foreign affiliates in Argentina .............. 114 Knowledge-seeking FDI in R&D operations ............................. Inc........ 113 Created assets ................................................................................................................. 116 Divestment ... 100 Incentives to attract FDI ..................................5 I..........................................1 V....................8 VII.......... 13 Total private flows to developing countries...................... 224 The Asian crisis and its implications for TNCs: the case of Motorola .....

.............. 1995-1996 ............23 I... 41 Top 5 decreases in foreign employment among the world's top 100 TNCs. 28 Industry profile of partnering activity in inter-firm technology agreements...... 1982-1996 ........... 1998 .........15 II... 20 Principal home countries of firms engaged in large cross-border M&As.. 1995-1996 ............ and M&As.7 II...... 1993-1997 .......................................13 I.20 I. 25 The portfolio of technology agreements of Ford............17 I................... 24 The share of the world's largest 100 firms in total inter-firm technology agreements................................... 43 The top 5 rises in transnationality among the world's largest TNCs...........................24 I........ 40 Top 5 decreases in foreign assets among the world's top 100 TNCs......11 I...... 53 Top 5 rises in transnationality among the top 50 TNCs from developing countries............................................... 25 Number of inter-firm technology agreements. 1980-1996 ...13 II..............6 II............................................15 I......... 1995-1996 ...... by group of countries.............................................................................................................................. 1995-1996 .................... 1995-1996 .......................... 1989-1997 ............. 1995-1996 ...... 51 Top 5 increases in foreign assets among the top 50 TNCs from developing countries........17 II...................... 28 Developing countries: number of inter-firm technology agreements.................................16 I. 1995-1996 ......................................14 I............................. 1995-1996 ...... 29 The world's 100 largest TNCs: the five most important home countries... 1996 .......... 1980-1996 ...2 II........... 23 Inter-firm technology agreements....... 1995-1996 ... 51 Top 5 increases in foreign sales among the top 50 TNCs from developing countries..................................................... 52 Top 5 decreases in foreign sales among the top 50 TNCs from developing countries............................................................................ by developing country firms and all firms............................................ 21 Cross-border links among major TNCs in the automobile industry........... 1995-1996 . 1995-1996 ...................12 I......................... 1995-1997 .............................................................................................21 I....................... 1983-1996 ...............18 II............. by selected industry.... 1995-1996 .......................................................... 51 Top 4 decreases in foreign assets among the top 50 TNCs from developing countries........... 1980-1996 ..................9 II......18 I..................... 24 The evolution in the type of inter-firm technology agreements...........................1980-1996 ........................................... 40 Top 5 increases in foreign employment among the world's top 100 TNCs....................................................................................... 40 Top 5 increases in foreign sales among the world's top 100 TNCs................................................ 45 Average in transnationality index of the top 5 TNCs in each industry.... 40 Top 5 decreases in foreign sales among the world's top 100 TNCs........12 II............. 1995-1996 ........................... 21 Cross-border M&A sales and purchases...10 II....................... 22 Sectoral distribution of cross-border M&As...................................................................... 45 The top 5 falls in transnationality among the world's largest TNCs............................ 1995-1997 ................................................................3 II........ 23 The growth of inter-firm technology agreements....... 41 Average transnationality index of the world's 100 largest TNCs......................... 53 x .............14 II....19 I.................16 II.......................... 1980-1996 .......................... 1980-1996 .............11 II.....19 Cross-border and all M&As in the world ....................... 52 Top 5 increases in foreign employment among the top 50 TNCs from developing countries..........25 II....................4 II.............................................................................................................10 I................... 52 Top 5 decreases in foreign employment among the top 50 TNCs from developing countries.....................................a 1995-1996 ............ 1985-1996 ..... 1980-1996 ..........................................22 I.................................1 II.................. 46 Country breakdown of the top 50 TNCs from developing countries by number of entries for 1993 and 1996 .......... 1995-1996 ........Tr World Investment Report 1998: Trends and Determinants Page I............................................................................... 1990 and 1996 .......................... 28 Developing country firms and their partners in inter-firm technology agreements....................................8 II............. 39 Top 5 increases in foreign assets among the world's top 100 TNCs......... 27 The portfolio of technology agreements of Toyota............... 1990-1996 ...................5 II.. 20 Major targeted industries in large cross-border M&As.......................................................

.... 85 Average number of DTTs per country....................8 III..............6 V.................... 199 Asia and the Pacific: inward and outward FDI stock as a percentage of GDP................................................. 1960-1997 ...................................... 1960-1997 ................... 1960s-1990s ........................ by region.................... 1960-1997 .........7 xi ....3 VII............................................................................ 1989-1996 ................1 VII....1 VI..........................4 V...... 53 Cumulative number of countries and territories with FDI laws.................. 154 European Union................ 1996 ............. 207 FDI flows...................... 1995 ....... 55 BITs concluded in 1997......................... 177 Asia and the Pacific: FDI flows into the top 20 recipient economies...........................................3 III. 1991-1997 ...... 1994-1996 (annual average) . 1996 ........... 206 Cross-border M&As as a percentage of FDI inflows....9 V.........6 VII................................................. 1985-1997 .....................................4 VII.......................... 83 Number of countries and territories with DTTs.......................................................... 1996 and 1997 ............................................................................................................................ 142 Developed countries: FDI outflows............................. intra-European Union and United States FDI outflows........ by country group ..... 206 Asia and the Pacific: FDI outflows from the top 15 economiesa in 1997 and flows from the same economies in 1996 ........... 208 VII....6 VI.......................................... 1997 and flows to the same economies................ top 20 economies...........5 VI............................3 VI......................................7 VI..................... 166 FDI stock from France............................Contents Page II....................... by sector....7 III.. foreign portfolio equity flows and foreign bank lending to the Asian countries most affected by the financial crisis.....6 III..... 1995-1996 ........................... 1996-1997 ...................................... intra-European Union and United States FDI inflows............................................... 1996 ........................ 1996 and 1997 ..... 171 Profitability of foreign affiliates of Japanese TNCs..................................... 1996 ............................................2 III................................. 86 The correlation between DTTs and BITs signed by countries..................... 1994-1996 ..............20 III................................................... top 20 countries.. 1985-1997 ..... 142 Developed countries: FDI flows as a percentage of gross fixed capital formation.1 III................................ 163 Africa: FDI flows into the top 20 recipient countries in 1997 and flows to the same countries in 1996 ............ by selected host region..... by decade... 1996-1997 ............ 1994-1996 .................................................................................. 143 Developed countries: growth of FDI............................................................. 85 DTTs concluded in 1997.....................................4 III....................... 1960s-1990s ........... top 20 economies..... by region and decade.......... 84 Number of DTTs concluded: top 20.............. 176 Africa: FDI flows from the top 17 outward investor countries in 1997 and flows from the same countries in 1996 ..... 1989-1997 ........................................................ VII........7 VII.............. 84 Number of intraregional DTTs...1 V.......................................................................5......................5 V...........................3 V..................................... 1997 ............................2 V.... 152 European Union. Germany........................... top 20 countries......................5 III......... 164 Africa: FDI flows as percentage of gross fixed capital formation................................ 1994-1997 ...........................4 VI............. 198 Asia and the Pacific: FDI inflows and outflows as a percentage of gross fixed capital formation........... 1953-1998 ...2 Top 5 falls in transnationality among the top 50 TNCs from developing countries......................... 59 Cumulative number of DTTs and BITs................................... 86 Developed countries: FDI inflows.................. 148 Developed countries: FDI stock as a percentage of GDP.......... 200 Asia and the Pacific: the relationship between cross-border M&As and FDI flows.................................... the United Kingdom and the United States in Africa......... by country group .................... 165 Africa: FDI stock as a percentage of gross domestic product..........................................2 VI..... 156 FDI inflows to Africa...................

211 Cross border M&A sales in the five Asian countries most affected by the financial crisis......25 VII.......20 VII..... by source region/country of investment.. by host country.........................6 IX....................................... 1993-1996 ............................. cumulated flows.1 IX..13 VII............................... 276 VII........ 1993-1996 .......................... cumulated flows 1993-1996 ........ 232 FDI in South Asia by region/country of investment...................................12 VII....................... 1992-1995 ...................... 232 FDI in Central Asia.................. 227 Profits growth of world's largest 500 firms....................................................................................... in selected countries of Latin America......... 1997-1998 .... 230 FDI in China... 1994-1996 (annual average) .....3 VIII.......................... 1996-1997 ....... top 20 economies........... 236 FDI in Latin America and the Caribbean. 231 FDI in Asian LDCs.... top 20 economies............ by home region...................................................................23 VII..........8 Cross border M&A purchases in the five Asian countries most affected by the financial crisis............................................ 236 Long-term prospects: overall response of companies worldwide ................................16 VII...................................15 VII........ survey responses...3 xii ....... 244 Latin America and the Caribbean: growth of FDI................. 247 The Caribbean: FDI inflows by major host economies.14 VII............... by region/country of investment..................................... 240 Long-term prospects: company intentions by sector ...... by source region/country of investment.................10 VII..... 1997-1998 ................. 211 Passenger car demand growth.......................Tr World Investment Report 1998: Trends and Determinants Page VII..................... 1994-1996 (annual average) ................4 VIII........ 229 TNCs headquartered in the Republic of Korea: effects on outward FDI.. cumulated flows 1993-1996 .. 1996 ...17 VII......... cumulative flows...............9 VII............. 272 Central and Eastern Europe: FDI flows as a percentage of gross fixed capital formation.....26 VIII...............................................1 VIII............................................... by source region/country of investment.................. 231 FDI in Viet Nam.................................................. 230 TNCs headquartered in the Republic of Korea: changes in investment intentions for 1998-1999 in the light of the crisis ........... 245 Latin America and the Caribbean: FDI flows as a percentage of gross fixed capital formation....... 1996 ............................... by region/country of investment.....2 IX................................ 1997 and flows to the same economies............ by region/country of investment............. cumulative flows....... top 20 economies................................ 1996 and 1997 ..................................11 VII.................................21 VII...24 VII..................... 236 FDI in Africa...................18 VII...... 1979-1997 ...................................... 240 Latin America and the Caribbean: FDI flows into the top 20 recipient economies in 1997 and flows to the same economies in 1996 ......... 1990-1996 . 228 Cross border M&A purchases by firms headquartered in the countries most affected by the crisis...... 275 Central and Eastern Europe: FDI stock as a percentage of gross domestic product........ by region/country of investment.......................................... 246 Latin America and the Caribbean: FDI stock as a percentage of gross domestic product.........22 VII............................... 1996 ..... cumulative flows.............................. 1997-1998 (first half) .....................2 VIII....................... 1997-1998 .................................... 1993-1996 .................................. 240 Long-term prospects: company intentions by home region of parent company .................................................. cumulative flows................................................................................................................................................................................................... by selected home economy..................................................... 1995/1996 ...... 1990-1997 ........................ 250 Central and Eastern Europe: FDI flows into the recipient economies....................5 VIII................... 224 Developing Asia's outward FDI stock..................... 250 Latin America and the Caribbean: FDI inflows by mode of entry.................. cumulative flows................... by destination...19 VII................... March 1998 ....... 1993-1996 .......................... 236 Central and Eastern Europe..............................

.............. 1996 ...............12 II...15 III.... 54 Countries and territories with special FDI regimes...6 II.......................................... 9 The world’s largest host and home economies for FDI flows.................................... 1996 .................1 of the TRIMs Agreement..... EEC (9) member countries......... 1990....... 125 Growth rates of inward FDI flows...2 I..........................7 I....................................................................2 III.................................................. 46 Averages in transnationality and foreign assets....................... 6 Germany............. 1996 ....... ranked by foreign assets............7 II............................................ 1996 .....................................Contents Page IX.... 125 xiii ......................4 II..................................................... 3 Regional distribution of inward and outward FDI stock.....1 I............3 Selected indicators of FDI and international production............ 276 Central and Eastern Europe: privatization-related FDI flows as percentage of total FDI inflows..............14 II.............................................5 II... royalties and licence fees..8 II..............2 II...... 1993 and 1997 .. 1995 and 1997 .... 39 Departures from the world’s top 100 TNCs........................... by type of enterprise.....8 I..... 1996 ...........1 III.... 1996 ...........................................11 II............. 1996 ............................9 II.................... 5 Indicators of production by foreign affiliates..........9 II.................................. 41 The world’s top 10 TNCs in terms of degree of transnationality.. by region......... 1994-1997 .......... ranked by foreign assets.................. 11 The world’s top 100 TNCs............................................................................ by type...............000 GDP and FDI flows per capita..... 45 Transnationality index for small and large home economies.......3 II.......... 46 The top 50 TNCs from developing countries ranked by foreign assets....2 IV.....................4 I.. by industry... 36 Newcomers to the world’s top 100 TNCs....... 50 Newcomers to the top 50 TNCs from developing countries.................. 48 The top 5 TNCs from developing countries in terms of degree of transnationality................ 1996 ................. June 1998 ..... 1990 and 1996 ................... 1986-1997 ............................... 1998 ..................................................4 III.......... 91 Share of the EEC (6) in United States' outward FDI stock ...........10 II.. by country/group of countries..................................... 1997 ........... by area and economy... 1983-1992 ......... 56 National regulatory changes................................................1 II.... 57 National regulatory changes and their distribution........ 39 Industry composition of top 100 TNCs............ 39 Snapshot of the world’s 100 largest TNCs..................... 1996 ........4 IX.... 1996 ........... Japan and United States: receipts from patents................................................................... 5 Importance of production by foreign affiliates...... ranked by foreign assets......5 I......... 1996 ... 53 Industry composition of top 50 TNCs from developing countries in 1993 and 1996 ............ FDI flows per $1..... 50 Averages among the top 50 TNCs from developing countries in transnationality........................................................... 50 Snapshot of the top 50 TNCs from developing countries........ 1982-1997 .............13 II. 1991-1997 ................ 1990 and 1996 .1 IV..................................... 59 Host country determinants of FDI ................ 1996 ...................................................... latest available year ......... 1985......5 IX...6 I......... by industry............................ 1993-1997 ..... 57 Measures notified under Article 5.....3 III............3 I................... 50 Departures from the top 50 list of TNCs from developing countries.............. 278 Tables I.... 1986 and 1996 ................................................... 6 China: Machinery imports and their share in total imports......... 277 Central and Eastern Europe: FDI flows from the economies in 1997 and flows from the same economies in 1996 ........................................... 58 Export processing zones and free zones................................................5 IV.... 2 Number of parent corporations and foreign affiliates...................... 1996 .. 1993-1997 ................................ 1982-1997 ....... 1996 ....6 Central and Eastern Europe: stock of inward FDI..... 7 Regional distribution of FDI inflows and outflows........

....................................................................... VI.....4 Japanese outward FDI on a notification basis..3 Privatization transactions involving foreign investors in Africa.......................8 Africa: selected indicators of macroeconomic stability for recent FDI frontrunner countries and averages for all Africa .......................2 The major home countries for FDI flows into Africa.......1 FDI inflows into the Asian countries most affected by the financial crisis................. and real GDP per capita .......... V. VI..... growth in real GDP.... 1997 .. employment and capital expenditures of United States TNCs..... real GDP per capita..12 Africa: selected indicators of the level of education and infrastructure facilities in recent FDI frontrunner countries and for all countries ................. real GDP per capita...........A................10 Africa: average annual growth rates of real GDP.................................................................3 United States: share of parent companies in gross product......................... and real GDP per capita for a smaller group of countries .....................................3......................... V......... by region and by industry............ VI.........................first quarter of 1998 ....A........................................Tr World Investment Report 1998: Trends and Determinants Page IV..A............... selected indicators.. and residuals from inward FDI stock equations . 1996 ....................... past growth in real GDP....................................................................2.... 135 137 137 138 138 139 139 149 151 153 159 160 167 170 172 173 174 176 179 181 182 186 186 189 201 xiv . past growth in real GDP.............5 Number of foreign branches of major Japanese banks.......................... 1996 in recent FDI frontrunner countries and all countries .... IV.........A.......... IV.........A............. current growth in real GDP........................................................................................A............... and real GDP per capita........A...... 1982-1996 ............ 1987-1991 and 1992-1996 .......................... current growth in real GDP...................................... 1995-1997 ................................ and political stability developing countries ........... VI........... 1997 ......... 1990........... V..................... Regressions of nominal inward FDI flow on nominal GDP.......................1 FDI flows into the least developed countries in Africa........ 1997 and 2000 ..............................6 Rates of return on United States FDI in Africa and selected regions...... VI................. V................ IV........ VI........................................................... IV.....5 African members of the World Association of Investment Promotion Agencies (WAIPA).............. 1983-1997 . IV.. past growth in real GDP.......... and residuals from inward FDI stock equations and political stability...7 Regressions of nominal inward flow of FDI on nominal GDP............. current growth in real GDP........ 1991-1997 and GDP (current prices)............ VI........5 Regression of nominal inward stock of FDI on nominal GDP.......... real GDP per capita.. VI.......2 United States: R&D expenditure per employee in foreign affiliates and parent firms............................. 1982 and 1995 ........................1 United States: FDI inward and outward flows........... real GDP per capita......................... developing countries ............. Regression of nominal inward FDI stock on nominal GDP....... VI...11 FDI inflows into Ghana by sector and industry...................................... V..4 Regression of nominal inward stock of FDI on nominal GDP............ 1987-1991 and 1992-1996 ........................ VI............... VII.. developing countries ....... and residuals from inward FDI stock equations........................................ VI....... developing countries ..........9 Africa: total real trade as a share of GDP and indicators of trade barriers in recent FDI frontrunner countries and other African countries ..........................6 Regression of nominal inward stock of FDI on nominal GDP..... VI..4 The investor friendliness of the FDI regulatory framework in Africa: rankings according to several indicators....7 Africa: Recent FDI frontrunners by selected indicators........................1.......... 1985-1997 .................... 1990 and 1995 ..... Regression of nominal inward stock of FDI on nominal GDP...... IV.................................................................................................................... 1995-1997 ............

................... 1993-1997 ..................................................... 1989 and 1995 ..9 IX................... by sector......4 IX. by sales.................................................2 IX...... Central and Eastern Europe: average annual rates of growth of inward FDI and gross domestic product.................................... GDP and imports ......................................3 VII.................................................................February 1998 ..... Latin America and the Caribbean: export propensity of the top 100 companies in Latin America in selected countries. 210 216 226 235 237 238 249 251 254 256 257 VIII.................... fall in share prices and interest rate changes in the most affected economies................1 VIII................................................... Latin America and the Caribbean: FDI in terms of types of corporate strategies................................................................... Republic of Korea: major elements of the FDI promotion programme ......... 1996 ...........10 IX.... 1994 and 1996 ............................................................................. by industry........................ Central and Eastern Europe: relative importance of foreign-owned companies in manufacturing........ 1990s ............... 1998 .5 VII........ Latin America and the Caribbean: exports of goods of United States parent companies to affiliates in Latin America.. Summary of effects of the crisis and possible implications for FDI in the short and medium term in and from countries affected by the crisis ...4 VIII.. compared with shares in population.....6 266 267 268 273 274 274 277 281 281 282 284 285 286 288 VIII......5 Currency depreciation................................................. Central and Eastern Europe: inward FDI performance........................................ by sector of activity and company status...... July 1997 ..... The share of Asian developing countries in FDI in Japan.........4 VII.....7 VIII.......... Central and Eastern Europe: factors enhancing or constraining inward FDI...............................1 IX....... Selected indicators of the importance of inward FDI................. 1998-2002 ........................................ Export propensity of Japanese and United States affiliates in the Asian countries most affected by the financial crisis........ FDI inflows in selected Latin American countries.......... Central and Eastern Europe: factors expected to enhance inward FDI....................................................................... 1997 .... relative to import of goods of parent companies from affiliates........11 xv ................................. Latin America: the 20 biggest foreign affiliates.........6 IX.................................. Central and Eastern Europe: survey responses with respect to degree of success in terms of attracting and absorbing FDI.. 1996 ........ by region...3 VIII.. Latin America and the Caribbean: payments of direct investment income by Latin American host countries............ Latin America and the Caribbean: export propensities of United States majority-owned foreign affiliates in manufacturing.....................2 VIII........... Central and Eastern Europe: geographical distribution of inward FDI stock in selected countries.....................3 IX..................Contents Page VII........8 IX...............8 IX......... Short...............................................................5 IX..6 VII........ the United States and the European Union... by host region ........ 1996 ......... Central and Eastern Europe: share in world inward FDI stock and flows.................... Central and Eastern Europe: sectoral and industrial distribution of inward FDI stock in selected countries........... by country ... 1985-1996 ......................................... 1990-1996 ............................. 1995-1997 ...... 1997 ........................................7 VIII......................................... compared by respondents with other regions...... 1983-1995 ................. 1995 .........................7 IX................. Latin America and the Caribbean: payments of royalties and licence fees by Latin American host countries...... 1997 .. 1985-1996 ... 1993-1997 .......................... Central and Eastern Europe: selected indicators of the importance of inward FDI....................and medium-term investment intentions of the world's leading TNCs in the light of the Asian crisis......2 VII................................

Tr World Investment Report 1998: Trends and Determinants xvi .

the value of international production.5 trillion as measured by the accumulated stock of FDI. and $9.000 TNCs and their 450. attributed to some 53. production Worldwide foreign direct investment (FDI) inflows continued their upward climb in 1997 for the seventh consecutive year. while outflows reached $424 billion. suggesting that the expansion of international production has deepened the interdependence of the world economy beyond that achieved by international trade alone.. In 1997. .6 trillion in 1997.VERVIEW OVERVIEW Foreign direct record strengthening Foreign direct investment set a new record in 1997. they increased by 19 per cent to a new record level of $400 billion. was $3. expanding and strengthening international production worldwide.000 foreign affiliates. and GDP attributed to foreign affiliates accounts for 7 per cent of global GDP. Other indicators also point in the same direction: global exports by foreign affiliates are now some $2 trillion. These figures are also impressive when related to the size of the global economy: the ratio of inward plus outward FDI stocks to global GDP is now 21 per cent. including capital for direct investment purposes drawn from sources other than transnational corporations (TNCs).5 trillion as measured by the estimated global sales of foreign affiliates. and the global value added by them more than $2 trillion. Sales of foreign affiliates have grown faster than world exports of goods and services. Seemingly unaffected by the Asian financial crisis. The capital base of international production in 1997. is estimated to have increased by $1. and the ratio of the volume of world inward plus outward FDI stocks to world GDP has grown twice as fast as the ratio of world imports and exports to world GDP.. foreign affiliate exports are one-third of world exports. The upward trend in investment flows supported further the expansion in international production. their global assets $13 trillion.

Naturally. but Orient Overseas International ranked first in the composite index of transnationality. with the 100 lar gest TNCs in the world having become highly largest largest transnationalized and the 50 largest developing country TNCs catching up. firms at the top of the composite transnationality index are from countries with small domestic markets. sales and employment. Germany registered net FDI withdrawals. while food and beverages. but their dominance is being eroded. The United States received $91 billion in inflows. the United Kingdom received $37 billion (just under a tenth per cent of global inflows) in 1997. Among the countries of the European Union. While the value of the index for the top 100 TNCs is higher. and a renewed interest in European integration prompted by the expected advent of the Euro in 1999 led to a spurt in the share xviii .. with their values as well as shares of global inflows increasing markedly: from $34 billion in 1990 (17 per cent of global inflows) to $149 billion in 1997 (37 per cent of global inflows). construction and trading being the most transnational in the case of the top 50 developing country TNCs.. chemicals and pharmaceuticals.. and invested $115 billion abroad during the year. improved economic performance in many Western European countries. Likewise. increasing from one-fifth in 1990. accounting for more than one-fifth of global inflows. dominate the global picture. in contrast. the value of the index for the top 50 developing country TNCs has been increasing steadily throughout the 1990s. for the second successive year. The top 50 TNCs headquartered in developing countries are catching up rapidly. It is in flows of inward FDI that developing countries have made the biggest gains over the 1990s. strong …despite the strong investment performance of developed countries in 1997. There is no doubt that the developed countries. Seagram ranks first in the composite index of transnationality. there are significant differences by type of industry. Developing countries accounted for nearly a third of the global inward FDI stock in 1997. and the mergers-and-acquisitions (M&As) boom are the principal reasons for the acceleration of inflows to developed countries in 1997 (an increase of almost a fifth over 1996. to $233 billion). Developing countries continue to be major players in FDI inflows. The transnationality index of the former was 35 per cent in 1996.Tr World Investment Report 1998: Trends and Determinants . while that of the latter was 55 per cent. foreign sales and foreign employment in their total assets. it did not change significantly between 1990 and 1995. Daewoo Corporation topped the list of the 50 largest developing country TNCs by foreign assets. In contrast.. The world’s 100 largest TNCs show a high degree of transnationality as measured by the shares of foreign assets. and electronics and electrical equipment were the most transnational among the world’s top 100. Not surprisingly. Outflows from the European Union were $180 billion in 1997. with telecommunications. Continued strong economic growth in the United States. The composite index that combines all three shares bears this out: the top 50 TNCs headquartered in developing countries have built up their foreign assets almost seven times faster than the world’s top 100 TNCs between 1993 and 1996 in their efforts to transnationalize. transport. The ranking of TNCs by the different transnationality indexes also differs: although General Electric tops the list of the largest 100 TNCs ranked by the size of foreign assets. with more than two-thirds of the world inward FDI stock and 90 per cent of the outward stock. The impressive numbers documenting the growth of international production disguise considerable variation across and within regions.

One outcome is a greater industrial concentration in the hands of a few firms in each industry. TNCs are achieving their goals of strategic positioning or restructuring not only through M&As but also through inter-firm agreements. These strategies have been made possible by liberalization (including the WTO’s financial services agreement in 1997) and deregulation (e.260 inter-firm agreements in technology-intensive activities have been concluded between 1980 and 1996. mostly in banking. with 108 concluded in 1997 alone. The number of double taxation treaties also increased. 36 countries introduced new investment incentives. insurance. such as the information industry and pharmaceuticals and. The common thread that runs through the proliferation of both types of treaties is that they reflect the growing role of FDI in the world economy and the desire of countries to facilitate it.g. though still low compared to other developed economies. France and Germany. broadcasting and energy that used to be closed to foreign investors. totalling 1. Given their emphasis on technology or joint R&D development. The United States. These deals are not only a major driver of FDI flows for developed countries. more recently. increasing from almost a half in 1996. Many of the 1997 M&A deals have been large and 58 of them were each worth more than $1 billion. but also shed light on the prevailing strategies of TNCs: divesting non-core activities and strengthening competitive advantages through acquisitions in core activities. chemicals. it is not surprising that inter-firm agreements are prominent in knowledge-intensive industries. or strengthened existing ones. New promotional measures included streamlining approval procedures and developing special trade and investment zones (adding to the many such zones already in existence). in automobiles. numbering 1. xix .513 at the end of 1997. During 1997. A subset of such agreements involves technology-related activities and is a response to the increased knowledge-intensity of production. Valued at $236 billion. in telecommunications). . 151 changes in FDI regulatory regimes were made by 76 countries. accounted for the biggest share of the large M&A deals. majority-owned M&As represented nearly three-fifths of global FDI inflows in 1997. were aimed at the global restructuring or strategic positioning of firms in these industries and experienced another surge in 1997. and invested $26 billion abroad. New liberalization measures were particularly evident in industries like telecommunications. pharmaceuticals and telecommunications. Such agreements are particularly important for enhancing the technological competitiveness of firms and their number has increased from an annual average of less than 300 in the early 1980s to over 600 in the mid-1990s. Together. Worldwide cross-border M&As. every two-and-a-half days. During 1997 alone.. An estimated 8.. the shortening of product cycles and the need to keep up with the constantly advancing technological frontier. The network of bilateral investment treaties (BITs) is expanding as well. followed by the United Kingdom. developed countries accounted for about 90 per cent of the worldwide majority-owned M&A purchases. a record figure. In that year one BIT was concluded.794 at the end of 1997. treaties regional with bilateral treaties and regional initiatives gaining momentum.Overview of investment directed to member countries. are efforts create Countries are continuing their efforts to create favourable conditions for FDI. on the average. Japan received $3 billion in 1997. usually TNCs. 89 per cent of them in the direction of creating a more favourable environment for FDI.

been taking place mainly in the WTO and UNCTAD. when pressures grew to make them more transparent and to initiate a broad-based public debate on FDI issues... In Africa. . . resilience … showing resilience in the face of the financial crisis in Asia and the Pacific. such as portfolio equity investment. In pursuing this objective. have been launched. legally binding commitments. regional or multilateral level. The work of the WTO Working Group on the Relationship between Trade and Investment is focusing on the economic relationship between trade and investment. existing international arrangements and initiatives on trade and investment. the FTAA will consolidate and integrate the various free trade and investment areas already present in the region. there are preliminary discussions on new regional initiatives on investment in the context of the Southern African Development Community (SADC) and the Organization of African States. The ongoing negotiations on a Multilateral Agreement on Investment at the OECD reached a critical point in 1998 after two years of negotiations. If successful. However. on the other hand. broad-based …as governments engage in broad-based and wide-ranging discussions on agreements international investment agreements and their development implications. Unlike other net resource flows such as official development assistance or some other types of private capital. at least for now. In Asia. On the American continent. the ASEAN Investment Area is scheduled to be established later this year. intended to incorporate a comprehensive framework of rights and obligations with respect to investment.. Partly reflecting this situation. with no developing region experiencing a decline in the level of inflows. With $87 billion in 1997. a pause for reflection until October 1998 was agreed to by the OECD ministers. and for over a half of the developing-country FDI stock.Tr World Investment Report 1998: Trends and Determinants Discussions of regional initiatives are taking place in most regions in the context of new or existing agreements. and issues relevant to assessing the need for possible future initiatives. the implications of the relationship for development and economic growth. Although smaller than those of developed countries. UNCTAD. negotiations on the Free Trade Agreement of the Americas (FTAA). cooperative endeavours and strategic alliances and avoids.. be it at the bilateral. is seeking to help developing countries participate effectively in international discussions and negotiations on FDI. FDI inflows increased in 1997. the approach of the ASEAN Investment Area is different from that of other regional initiatives in that it emphasizes policy flexibility. East and xx . UNCTAD is paying special attention to identifying the interests of developing countries and ensuring that the development dimension is understood and adequately addressed in international investment agreements. Wide-ranging discussions at the multilateral level have. meanwhile. A new record level of $45 billion in FDI flows received by China contributed to the 9 per cent increase in total FDI flows to Asia and the Pacific in 1997. Asia and the Pacific accounts for nearly three-fifths of the FDI inflows received by all developing countries. Foreign direct remained source relative Foreign direct investment has remained a source of relative stability in capital flows to developing countries. the increases in 1997 in FDI flows into developing countries are noteworthy because they took place in an environment that presented a complex mix of adverse changes.

is showing signs of coming to an end. With inflows totalling $2. The region’s FDI pattern is also characterized by an increasing share of FDI received by the services sector. Malaysia and Thailand). The five Asian economies most affected by the crisis saw their combined FDI inflows remain at a level almost unchanged from that in 1996.. Japan. Furthermore.6 billion in 1997. poor infrastructure in the interior provinces that hinders investment in low-wage activities. as many of the region’s TNCs grapple with mounting debts and other difficulties. partly in response to corporate restructuring in the countries directly affected by the financial crisis. also saw a small increase of 6 per cent to $82.Indonesia. although the implications of the crisis for FDI in the most affected countries are are a matter for concern. Thailand and the Republic of Korea -. For Asia. foreign-investor participation in the restructuring of state-owned enterprises and a continued strong growth performance compared with other countries in the region could yet mitigate the expected drop. as a number of their FDI expansion projects were scaled down or put on hold. largely concentrated in oil-producing Kazakhstan and Azerbaijan. The FDI pattern emerging in Asia and the Pacific is characterized by a decline in intraregional investment. TNCs from the Republic of Korea.7 billion. having largely neglected Asia until recently. On the other hand.9 billion in 1997.Overview South-East Asia. FDI approvals have fallen from $111 billion in 1993 to $52 billion in 1997. partly because of liberalization but also in direct response to efforts by some host countries to become regional investment hubs. ongoing FDI liberalization. affected . excess capacity in several industries due to overinvestment or weaker demand conditions. While these considerations suggest an impending decline in FDI flows to China. Finally. Malaysia and Thailand had a much lower profile. now in its sixth consecutive year. The biggest investor is Hong Kong. the subregion most affected by the financial crisis in Asia during the second half of the year. which constrict their outward flows to China. Malaysia. which received $1. while firms from Singapore and Taiwan Province of China were actively involved in acquisitions of firms in crisis-afflicted countries. with an outward stock of $137.. Philippines. with big projects in naturalresource-seeking investments. and adverse economic conditions in its biggest FDI source economies in Asia (Hong Kong. China and Indonesia experienced large increases in outflows. M&As are gaining in importance as a mode of investment in Asia and the Pacific. the most important question relating to foreign investment is how the crisis and its xxi .4 billion in 1997 but this trend is unlikely to continue in 1998. China. are now taking an active interest in the region. currency depreciations in other economies that are eroding the price competitiveness of foreign affiliate exports. massive infrastructure building. FDI outflows from Asia and the Pacific increased by 9 per cent in 1997 to $50. Central Asia has become a more important destination for FDI than West Asia. The expectation of a decline is based on several aspects of the national and regional economy: a slowdown in economic growth from its exceptional performance of the past few years. China’s current FDI boom. The rate of increase of FDI inflows declined to 11 per cent in 1997 from an average of 147 per cent between 1992 and 1993. China. and especially the five Asian countries -.5 billion in 1997.stricken by the financial crisis in the second half of 1997. the Republic of Korea. European TNCs. wage increases in the coastal areas that are eroding its locational advantage in low-cost labour-intensive investments.

TNCs in the affected Asian economies. Some of the changes are actually conducive to increasing FDI flows to the affected countries. A second factor conducive to increasing FDI in the most affected Asian countries is the improvement in their international cost competitiveness due to devaluations. especially in Thailand and the Republic of Korea. these need to be taken seriously.while production for export by foreign affiliates already well established in both Thailand and Malaysia seems to be increasing. in particular in the five most affected countries. Firms interested in strategic positioning in Asia and the Pacific or seeking created assets to complement their worldwide portfolio of locational assets might find it attractive to establish or expand operations in these countries at the present time. especially in the short and medium term. the crisis and its aftermath have changed a number of factors that influence FDI and TNC operations in the affected countries. including bank lending and portfolio equity investment. can take advantage of their corporate systems of integrated international production to strengthen their export orientation substantially.Tr World Investment Report 1998: Trends and Determinants economic consequences will affect inward FDI in the short and medium term. . FDI plays an important role in the region and could thus assist the countries in the process of their economic recovery. can remain impervious to the changes that the crisis has set in motion. most of which already have fairly liberal frameworks for FDI. Governments in the countries most affected by the crisis. have further liberalized their FDI regimes. FDI in export-oriented industries (such as electrical and electronics manufacturing) has risen in Thailand -. so as to avoid a backlash. They have also intensified their efforts to attract FDI both individually and collectively. which are already highly export-oriented in certain industries. One is the decrease for foreign investors in the costs of acquiring assets whose prices have fallen. fell sharply and even turned negative in 1997 as a whole. In addition. if they can afford to take a long-term view of the market prospects in the region or if they produce for export rather than domestic or regional markets. opening new areas and relaxing rules. There is evidence that firms from the United States. Western Europe and less affected economies in the region have taken the opportunity to invest in the crisis-affected countries. including in the context of IMF adjustment programmes. effects are increasing While some effects of the crisis are conducive to increasing inward FDI. This is especially relevant for export-oriented FDI and there are already signs that investors are responding to the changes in the relative costs of production.. in order to enhance the competitive positions of TNCs. Nevertheless. neither FDI flows nor the activities of foreign affiliates in the region. remaining positive and continuing to add to the capital stock of the affected countries while other capital flows. FDI flows to the region have been quite resilient in the face of the crisis. This is not surprising given that FDI is investment made with a long-term interest in production in host countries. xxii . however. the availability of firms seeking capital and the liberalization of policy with respect to M&As makes the entry of foreign investors through the acquisition of assets easier than before. at least in the short and medium term. The potential positive impact of both lower asset prices and decreased operational costs on inward FDI could be enhanced by the liberalization moves and promotional efforts that are being made by the affected countries. The increasing importance of M&As as a mode of entry may.as it had in Mexico after the Peso crisis -. give rise to concerns over the loss of national control over enterprises.. All this makes it easier for TNCs to enter or expand their operations at the present time. Indeed.

Affiliates producing goods and services that depend mainly on imported raw materials and intermediate inputs would be more seriously affected than those relying on domestic sources. It is difficult to predict how the various factors set in motion by the crisis will affect. economic xxiii .. and most importantly. because of the non-tradability of most services. decreased from . on balance. but much depends on the extent to which the financial crisis spills over into the real sector... However.. On the other hand. postponed or even cancelled investment projects in some of these countries.. increased debt burdens on foreign-currency denominated loans. difficult predict region . although long-term prospects remain sound. given that the FDI determinants proper -. For firms focused on domestic or regional markets. scaling down or postponement of FDI in the most affected countries. Despite their overall resilience. Viet Nam and the least developed countries of the region. inward FDI to the crisis-stricken countries and to the region as a whole in the short and medium term. some countries may also lose export competitiveness vis-à-vis the countries that have devalued. Aside from that. most importantly.mainly because of decreased outward FDI from some Asian home countries. For one thing. in which TNCs figure prominently in the region. The implications of the financial crisis for inward FDI are also likely to extend to other. affect adversely. many Asian developing countries. These factors could reduce their attractiveness as host countries. relocating parts production. firms have also adopted various other measures to cope with the crisis. Foreign affiliates in the services sector are particularly susceptible to local demand conditions... but flows decreased from all the five crisisaffected countries except Indonesia. The automotive industry. including injecting funds to help their financially distressed affiliates and subcontractors. some countries. The crisis is likely to reduce the financial capacities of Asian TNCs (including TNCs from Japan) to undertake FDI on account of valuation losses.. . business facilitation and.making it difficult to predict the overall impact on FDI in the region in the prospects remain short and medium term. The impact of these factors is further compounded for some TNCs by a credit crunch at home and difficulties in raising funds abroad. the impact on domestically-oriented foreign affiliates varies among industries. overall outward FDI from developing Asian economies rose. some consequences of the crisis will affect FDI adversely in the short and medium term. boosting exports and increasing domestic sourcing. Furthermore. flows to the affected countries and to the region as a whole may well fall in 1998.. especially those with close economic links to the countries most affected by the crisis. .. including China. developing countries in Asia. reduced demand and slower growth can be expected to lead to some cancelling. others will affect it adversely. In 1997.regulatory frameworks. at least in the short run.. depend heavily on FDI from other developing Asian countries and inward FDI flows to them could decrease because of a decrease in outward FDI from the countries affected by the crisis. less seriously affected. are likely to experience lower economic growth. is a good example of the impact of the crisis and the range of responses: a number of automotive TNCs have scaled down. FDI to countries not seriously caught up in the crisis may also decline. and reduced profitability of operations due to contraction of demand.Overview .

Structural reforms. First. wide-ranging privatization. still important in a number of countries. especially as far as market-seeking FDI is concerned. Services FDI. liberalization and privatization. privatization programmes have provided opportunities for expansion for both market-seeking and resource-seeking TNCs.and invested a record $9 billion abroad. growth. is almost exclusively geared to international markets.. the United States and Asia to invest in the growing MERCOSUR market. as witnessed by the sizeable contributions of TNCs to the region’s exports and by increases in the export propensity of United States manufacturing affiliates. MERCOSUR has given a boost to both intraregional and extraregional FDI. In the services and primary sectors. Primary-sector FDI. The increase in inflows accounted for two-thirds of the overall increase in inflows to all developing countries. the extent to which these various factors translate into actual flows will depend on the assessment by TNCs of the long-term prospects of the region in the context of their own strategies for enhancing competitiveness. TNCs will be reluctant to invest. due to stability. If their assessment is negative. regions growth. has given rise to some exports in certain tradable services and may have increased xxiv . there is room for cautious optimism. The rationale for the latter view is that the fundamental features of the region as a destination for FDI remain sound. economic stability. deregulation and regionalization. particularly in automobiles and chemicals. mostly geared to national markets. Despite the growing role of Asian and intraregional FDI. Latin America now tops developing regions in inward FDI growth. the United States is still the largest investor in Latin America and the Caribbean. but that they may even improve as countries strengthen certain aspects of their economies in response to the crisis. Government policy has also played a crucial role in generating the conditions under which the current FDI boom in Latin America and the Caribbean has occurred. mostly in automobiles. . FDI flows to Asia will continue on their upward trend without serious interruption. key factors in the region’s FDI boom were trade liberalization.Tr World Investment Report 1998: Trends and Determinants determinants of long-term growth -. Apart from sustained economic growth and good macroeconomic performance. with its investment in the region reaching $24 billion in 1997. The turnaround in FDI flows to Latin America and the Caribbean that occurred in the early 1990s was further strengthened in 1997: the region received $56 billion -. there are some signs that TNC activities in Latin America have become more export-oriented. growth. With more than $16 billion in inflows.. However. electronics. These same features suggest not only that longer-term FDI prospects for the region remain positive. with the United States market being the final destination of exports. If they take a positive view and take advantage of the crisis to position themselves strategically in the region. In contrast.are attractive. most of the manufacturing FDI in Mexico and the Caribbean Basin has been efficiency-seeking. Global competition and market expansion are prompting TNCs from Europe. Brazil emerged as the region's champion in 1997. and that the changes resulting from the crisis have positive as well as negative implications for FDI.an increase of 28 per cent over 1996 -. and cautious in acquiring assets in the region. Latin America’s strong FDI performance has been accompanied by changes in the nature of the investment it receives. surpassing Mexico with $12 billion and Argentina with $6 billion. macroeconomic stabilization and adequate macroeconomic management have also contributed to the export performance of foreign affiliates and domestic firms. apparel and other manufacturing.

particularly through investment promotion activities. almost threefifths of FDI flows from the major home countries of TNCs in Africa -. The recent FDI boom in Latin America has also been accompanied by large and rising current-account deficits. Germany. Tunisia and Uganda -. In the longer run. Equatorial Guinea. suggesting that the widely held assumption that Africa receives FDI only on the basis of natural resources is mistaken. FDI flows to Africa have stabilized at a significantly higher level than at the beginning of the 1990s: an average of $5. but also of final consumer goods. including fast-growing national markets. efficiency-seeking FDI in the country also play a role. the United Kingdom and the United States -.2 billion during 1991-1993. access to large regional markets. reviving concerns over a negative balance-of-payments impact.7 billion.Overview exports indirectly through services-related activities of manufacturing operations. almost the same as in 1996.2 billion during 1994-1996 compared to an average of $3. Mozambique.in the case of Tunisia -. FDI in Central and Eastern Europe has bounced back. What all these “frontrunner” countries have in common is significant progress in improving their regulatory FDI frameworks as well as significant progress in strengthening political and macroeconomic stability. Central and Eastern European economies broke their stagnating FDI trend in 1997 -the first year the region as a whole registered a positive GDP growth rate in recent years -by receiving record FDI flows of $19 billion. Most of them have also stepped up efforts to create an FDI-friendly business climate. significant privatization programmes and -. Africa’s remained unremarkable …but Africa’s performance has remained unremarkable – with some exceptions. inflows were $4. if TNCs begin by establishing sales affiliates and distribution networks. they are by no means the only explanation for their relative success in attracting FDI. The immediate effects of trade liberalization on the balance of payments may well be negative because FDI tends to generate higher imports not only of capital and intermediate goods. the strengthened export orientation of foreign affiliates should help to improve current account imbalances. Judging by data for United States and Japanese affiliates in Africa. however. not only in comparison to other African countries but also to developing countries as a whole. a group of seven countries -. Namibia. and if complementary policies to strengthen domestic capabilities and linkages are also pursued. in response to the trend towards integrating manufacturing affiliates into global production networks. In addition. While natural resources are an important determinant for FDI flows into most of these countries. 44 per cent more than in 1996. While Africa trails other developing regions in attracting FDI. In 1997. A number of other factors.conditions encouraging the location of export-oriented.have gone into manufacturing and services since 1989.Botswana. The lion’s share of export creation by foreign affiliates has taken place in manufacturing. the continent remains a highly profitable investment location as companies receive rates of return on their investments that by far exceed those in other developing regions. This turnaround xxv . especially as import growth normalizes once the adjustment of foreign investors to the new policy environment is completed.France. which can be most clearly observed in Mexico and the Caribbean Basin.stand out in terms of relative FDI inflows and their growth during 1992-1996. Ghana.

. their accumulated FDI stocks are therefore small. The Russian Federation was the leading recipient. a long transition-related recession and a lack of experience in FDI facilitation measures. can translate into different location patterns depending on the investor ’s strategy. mainly in natural resources and infrastructure development. Three broad factors determine where TNCs invest: the policies of host countries. by influencing the effectiveness of FDI policies. are The principal determinants of the location of FDI are the policy framework. In general. xxvi . will pretty much ensure a reduction in FDI. Policies that affect FDI but have not been designed for that purpose constitute the “outer ring” of the policy framework. through intra-firm rather than arm’s-length transactions. it is necessary to understand how TNCs choose investment locations. However. but they do not guarantee this. a necessary but not sufficient determinant of FDI relatively location is becoming relatively less important with liberalization and globalization . as well as over time. These include trade policy and privatization policy. sufficient The FDI policy framework. standards of treatment of foreign affiliates and the functioning of markets.e.Tr World Investment Report 1998: Trends and Determinants took place after a decline of 10 per cent in 1996. and the characteristics of their economies. outflows from Central and Eastern Europe more than tripled in 1997. In contrast. The core enabling framework for FDI consists of rules and regulations governing entry and operations of foreign investors. Different motives.8 per cent in 1997. however. i. In the other Central and Eastern European economies. and the size and strategy of the investor.. changes in FDI policies have an asymmetric impact on the location of FDI: changes in the direction of greater openness may allow firms to establish themselves in a particular location. Complementing core FDI policies are other policies that affect foreign investors’ locational decisions directly or indirectly. The contents of both rings differ from country to country. Policies designed to influence the location of FDI constitute the “inner ring” of the policy framework. To explain the differences in FDI performance among countries and to ascertain why firms invest where they do. remains uneven. and privatization efforts. the strengthening of regulatory and institutional frameworks relevant for TNC operations. Core FDI policies are important because FDI will simply not take place where it is forbidden. the proactive measures countries adopt to promote and facilitate investment. The relative importance of different location-specific FDI determinants depends on the motive and type of investment. the industry in question. FDI takes place when firms combine their ownership-specific advantages with the location-specific advantages of host countries through internalization. To a large extent. changes in the direction of less openness. As for outflows. reflecting the diverse experiences of countries in the transition to market-based economies. measures business facilitation measures and economic factors. most of the FDI growth occurred in manufacturing and services. nationalizations). especially if radical (e. The FDI pattern. Despite this turnaround.g. The small stock also reflects the influence of various obstacles such as problems in the legal and regulatory frameworks. Central and Eastern Europe’s share in world inward FDI stock is still low: 1. for example. with the Russian Federation as the leading outward investor. this is explained by the fact that the majority of the countries opened up to inward FDI fairly recently.

it must. the inner and outer rings of policies gains more influence. This is particularly important for efficiency-seeking FDI as firms integrate their foreign affiliates into international corporate networks. this may happen even before regional integration becomes a fact. however. Since an MFI is a hypothetical policy determinant. assure greater protection. In fact. A multilateral framework on investment (MFI) -. If a possible MFI should lock in unilateral liberalization measures. The inner rings for both inward and outward FDI tend to become similar. especially the joint coherence of FDI and trade policies. One outcome is a relative loss in effectiveness of FDI policies in the competition for investment: adequate core FDI policies are now simply taken for granted. stability and predictability. ranging from tariff reduction among members to policy harmonization on many fronts.if it were to be negotiated and if it were to lead to more similar FDI policy frameworks -. be understood that the implications of the various scenarios would vary from country to country in accordance with specific economic and developmental conditions and specific national stances vis-à-vis FDI. Even on the policy front. membership in a regional integration scheme usually requires at least some degree of FDI (or capital movement) policy harmonization. At the same time. because of this effect.Overview Since the mid-1980s. macroeconomic policies (which include monetary. it would enhance the FDI enabling xxvii . Foreign investors assess a country’s investment climate not only in terms of FDI policies per se but also in terms of macroeconomic and macroorganizational policies. to a negative or positive impact. moreover. and create pressures for (or even lead to) further liberalization. The key issue for inner-ring policies is policy coherence. in the case of developed countries. Regional integration frameworks may cover a wide spectrum of integration measures. quality and geographical pattern of FDI flows must be tentative and could range from scenarios that see no or very little impact. assessments of its possible impact on the actual quantity. Thus. as these can change a key economic determinant: market size and perhaps market growth.and outer-ring policies becomes more difficult to draw as the requirements of international production make higher demands on the efficacy of the policy and organizational framework within which FDI policies are implemented. the precise impact of a possible MFI would depend on the form it takes. Among the policy measures that can have a direct effect on FDI is membership in regional integration frameworks. Another outcome is that countries are increasingly paying more attention to the inner and outer rings of the policy framework for FDI. the boundary line between inner. such membership can be regarded as an economic determinant in its own right. This has provided TNCs with an ever-increasing choice of locations and has made them more selective and demanding as regards other locational determinants.would underscore the importance of the principal economic determinants and business facilitation measures in influencing location in a globalizing world economy. transparency. As the core FDI policies become similar across countries as part of the global trend towards investment liberalization. With developing countries. an overwhelming majority of countries have introduced measures to liberalize FDI frameworks. Globalization and FDI liberalization have exerted mutually reinforcing pressures on each other and the momentum for neither has subsided. fiscal and exchange-rate policies) as well as a variety of macro-organizational policies become increasingly relevant. and particularly whether it would merely lock in the FDI liberalization process or further encourage it. with positive effects on inward investment.

While these measures are not new. In the past. These changes mean that TNC participation in natural resource extraction is taking place more through non-equity arrangements and less through FDI. They fall into three clusters. improvements in amenities and measures that reduce the “hassle costs” of doing business. Financial or fiscal incentives are also used to attract investors even though they typically only enter location-decision processes when other principal determinants are in place. skills. relative The relative importance of economic determinants. in absolute terms or relative to the size and income of the population. should therefore not be exaggerated. after-investment services. They include investment promotion. it was relatively easy to distinguish the type of FDI corresponding to each of these motives. even though this involves high human capital and other costs. other issues that would need to be considered in connection with a possible MFI -. it would not create a more liberal policy framework than the one that already exists. and hence. it is also conceivable that if an MFI was of a “stand-still” type. Large markets can accommodate more firms and allow each of them to reap xxviii . Among these measures.on FDI flows in comparison to the current regulatory framework and the direction in which it is developing. although the value of FDI in natural resources has far from declined.if indeed it were to be negotiated -. The importance of this determinant per se has not declined but the importance of the primary sector in world output has declined. its impact on FDI determinants and flows would be difficult to detect. Furthermore.. . National market size.. has been another important traditional determinant. In addition. measures are relatively more . Expectations about the impact of a possible MFI -. Once an enabling FDI policy framework is in place. business facilitation measures have become more sophisticated. after-investment services can be singled out because of the importance of reinvested earnings in overall investment flows and because satisfied investors are the best advertisement of a country’s business climate. large indigenous.but these fall outside the scope of the present analysis which is specifically focussed on the determinants of FDI. increasingly targeting individual investors. Historically. if there were to be one. There are.. the most important category of determinants. corresponding to the principal motives for investing abroad: resource (or-asset)-seeking.especially the possible role of such an agreement in providing a framework for intergovernmental cooperation in the area of investment -. of course. know-how and infrastructure required for their extraction and sale to the rest of the world. However. incentives. It is in the context of a greater similarity of investment policies at all levels that business facilitation measures enter the picture. economic factors assert themselves as locational determinants. leading to market-seeking investment.if the other FDI determinants were in place. the availability of natural resources has been the most important FDI determinant for countries lacking the capital. enterprises have emerged in developing countries with the capital and skills to extract and trade natural resources. while business facilitation measures are becoming relatively more important.. often state-owned.Tr World Investment Report 1998: Trends and Determinants policy framework and could lead to more investment -. they have proliferated as a means of competing for FDI as FDI policies converge towards greater openness. market-seeking and efficiencyseeking.

characterized by strong links between foreign affiliates and parent firms. Much of the inward FDI of the 1960s and 1970s was drawn by large national markets for manufacturing products. however. such as the reliability of the labour supply and adequate physical infrastructure for the export of final products. based on largely autonomous foreign affiliates. Under simple integration strategies. Such investment. Technology and innovation have become critical to competitiveness. At the same time. but host country markets do not: it is access to international markets.. . The traditional motives for FDI have not disappeared either. The forces driving globalization are also changing the ways in which TNCs pursue their objectives for investing abroad. FDI and technology flows. Largely immobile low-cost labour was another traditional economic determinant of FDI location. More and more firms are therefore developing a portfolio of locational assets to complement their own competitive strengths when they engage in FDI. unskilled labour becomes the principal locational determinant. privileged or otherwise. to simple integration strategies. as well as links between TNCs and unrelated firms via non-equity arrangements. All of these factors are changing the relative importance of different economic determinants of FDI location. combined with deregulation and privatization. particularly important for efficiency-seeking investment. Complementing it are other determinants. However. as witnessed by the growing number of firms that are becoming transnational. Much of the investment in export processing zones and labour-intensive industries has been in response to simple integration strategies.Overview the benefits of scale and scope economies -. they are being incorporated into different strategies pursued by firms in their transnationalization process. Although this type of FDI is not new. These have evolved from the traditional stand-alone strategies. driven by cost-price competition and. more importantly. have improved firms’ access to markets for goods and services and to immobile factors of production and have increased competitive pressures in previously protected home markets. technological advances have enhanced the ability of firms to coordinate their expanded international production networks in their quest for increased competitiveness. the removal of trade (and FDI) barriers in an increasing number of countries and technological advances that permit quick changes in product specifications in response to changes in demand. forcing firms to seek new markets and resources overseas. The traditional determinants have not disappeared. Large national markets were also important for those services whose non-tradability made FDI the only mode of delivery to consumers. Openness to trade. as labour costs declined in xxix . …is changing under the impact of liberalization and globalization. they are becoming relatively less important in FDI location decisions. that matters. as TNCs increasingly relying increasingly pursue competitiveness-enhancing strategies relying on a portfolio of locational assets. High market growth rates stimulate investment by foreign as well as domestic investors. insurance and most infrastructural services. excluding foreign investors in many fields such as banking. especially for labour-intensive activities. it began to prosper under the conditions of globalization. rather. was initially small because FDI frameworks for services were typically restrictive.one of the principal reasons why regional integration frameworks can lead to more FDI. which were sheltered from international competition by tariff barriers and quotas.. Costs feature prominently.

Complex integration strategies can involve. As services became more tradable. as well as good infrastructure facilities. where profitable. Productivity and some level of skill. and to seek to match xxx . Access to international markets also became more important. With more and more TNC intermediate products and functions becoming amenable to FDI. the dividing line between is becoming increasingly blurred. TNCs undertaking such FDI take for granted the presence of state-of-the-art FDI frameworks that provide them with the freedom to operate internationally. and that are further enhanced by a range of business facilitation measures. but also access to technology and innovative capacity. particularly in their labour-intensive intermediate production stages such as data entry. that are complemented by the relevant bilateral and international agreements. finally. as distinct from natural resources. When it comes to the economic determinants. it is no longer sufficient for host countries to possess a single locational determinant. they too began to relocate abroad in response to simple integration strategies. this contributed to the upgrading of the locational advantages that countries could offer to TNCs pursuing simple integration strategies. One implication for host countries wishing to attract TNCs undertaking competitiveness-enhancing FDI is that created assets can be developed by host countries and influenced by governments. complex integration strategies allow TNCs that pursue them to maximize the competitiveness of their corporate systems as a whole on international portfolio of location assets. This contributed to the efforts of many developing countries seeking to gain permanent access to the markets of developed countries through trade agreements or regional integration arrangements. countries had to offer additional locational advantages over and above the availability of low-cost unskilled labour to attract FDI. infrastructure facilities. Consequently. In the process. To attract such competitiveness-enhancing FDI. in their efforts to attract the more sophisticated activities that TNCs were now locating abroad. The locational advantages sought by such service TNCs included computer literacy and a reliable telecommunication infrastructure. splitting up the production process into specific activities or functions and carrying out each of them in the most suitable. access to regional markets and. the new configuration also includes agglomeration economies arising from the clustering of economic activity. growing “created with a growing emphasis on “created assets”. Again. they are “created assets”. TNCs strategies are evolving from simple to complex integration. The challenge is precisely to develop a well-calibrated and preferably unique combination of determinants of FDI location. competitive pricing of relevant resources and facilities. Losing such access could mean losing this type of investment. are people-made. costcompetitive location. More than ever in the past.Tr World Investment Report 1998: Trends and Determinants relation to total production costs and as FDI in response to simple integration strategies became more mobile. It is precisely the rise in the importance of created assets that is the single most important shift among the economic determinants of FDI location in a liberalizing and globalizing world economy. gained in importance as locational determinants for this type of investment. Possessing such assets is critical for firms’ competitiveness in a globalizing economy. … which strategies give rise to a new configuration of locational determinants. countries that develop such assets become more attractive to TNCs. These resources. In addition. firms that undertake competitivenessenhancing FDI seek not only cost reduction and bigger market shares.

liberal national policy frameworks have lost some of their traditional power to attract foreign investment.including human resources. What is more likely to be critical in the years to come is the distinctive combination of locational advantages -. Also important are other policies that encourage the strengthening of created assets and the development of clusters based on them as well as policies that stimulate partnering and networking among domestic and foreign firms and allow national firms to upgrade themselves in the interest of national growth and development. market access and the created assets of technology and innovative capacity -. the trend towards increased flows of FDI world-wide and the creation of a more hospitable environment for FDI continues. Liberalization has proceeded at the international level through the proliferation of bilateral treaties and the creation of new regional markets and investment areas. It must be remembered too that created assets also enhance the competitiveness of national firms. infrastructure. * * * All in all. or the further liberalization of FDI policies in developing countries. One of the peculiar consequences of recent developments in the FDI area is that. Even the Asian financial crisis does not seem. August 1998 Rubens Ricupero Secretary-General of UNCTAD xxxi . policies aimed at strengthening innovation systems and encouraging the diffusion of technology are central because they underpin the ability to create assets.that a country or region can offer potential investors. to have greatly affected either FDI inflows to.Overview those determinants with the strategies pursued by competitiveness-enhancing TNCs. Geneva. Thus. by becoming commonplace. thus far.

Tr World Investment Report 1998: Trends and Determinants xxxii .

rose by over 10 per cent in 1997.5 trillion (annex tables B. sales. This chapter examines trends and developments with respect to various aspects of this phenomenon. The regional distribution of outward FDI stock is heavily skewed towards developed countries. A. International production The size and distribution of international production by TNCs -.3 and B. compensating for the decline in growth during 1991-1995 that reflected the recession of the early 1990s (UNCTAD.Chapter I CHAPTER I GLOBAL GLOBAL TRENDS International production by transnational corporations (TNCs) continues to grow in importance for both developed and developing countries. 1 Indeed. Subsequent chapters deal with the largest TNCs undertaking FDI (chapter II). 1996a). reflecting the fact that. world FDI stock. and the flows of FDI that contribute to the building up of international production capacity. which constitutes the capital base for TNC operations. developments in the policy framework within which they operate (chapter III) and the host country characteristics that determine where they invest (chapter IV). gross product and exports of these firms. in the past. Overall trends 1.can be gauged from estimates of the worldwide FDI stock. It then examines recent trends in inter-firm agreements as these are assuming increasing importance in certain industries. measures of foreign-affiliate operations.2 It is held by a minimum of 53.4). It begins by focusing on trends in the size and pattern of international production as indicated by world foreigndirect-investment (FDI) stock.large and small (table I. assets. to reach an estimated $3.1) related to FDI and TNC activities showed higher rates of growth in 1997 (as in 1996) than did GDP and exports.and hence their role in the world economy -. all major indicators (table I. More specifically.000 TNCs -. though there are some noticeable recent 1 . Subsequent chapters also contain more detailed analyses of the regional trends that are only sketched here (chapters V-IX). most FDI originated and stayed in developed countries.2).

1986-1997 able indicators production.7 c 12.9 -0. East and South-East Asia in world inward FDI stock nearly doubled during the past decade (table I.1 15. Tab le I.0 d 3 3 8 1 11 3 3 9 2 12 Memorandum: GDP at factor cost Gross fixed capital formation Royalties and fees receipts Expor ts of goods and non-factor services Source: a b c d 28 822 5 136 53 6 245 30551 5393 61 6432 UNCTAD.9 14.000 foreign affiliates in the world and in all likelihood many more (table I.0 21. There are at least 448.0 d 15.2).2 13.2 11.6 27.1 9. (Billions of dollars and percentage) Item FDI inflows FDI outflows FDI inward stock FDI outward stock Cross-border M&As a Sales of foreign affiliates Gross product of foreign affiliates Total assets of foreign affiliates Value at current prices (Billion dollars) 1996 1997 338 333 065 115 163 851 c 950 c 156 c 400 424 456 541 236 500 c 100 c 606 c d d d d Annual growth rate (Per cent) 1986-1990 1991-1995 1996 23.1 12. But even if the number of foreign affiliates (large and small) should be close to 1 million.1 18.4 8. Worldwide sales. are establishing foreign affiliates of modest size. Estimates. this could be an overestimation of the size of foreign affiliates in terms of assets.7 c 13. Selected indicator s of FDI and international production. Majority-held investments only.5 21. gross product and total assets of foreign affiliates are estimated by extrapolating the worldwide data of foreign affiliates of TNCs from France.0 d 3.5 2. the average size of assets owned by foreign affiliates worldwide in the mid-1990s was about $28 million.2 7. The share of South. The role that they play in host countries has become more and more important.3 c 7.0 c 6.5 15. Projection on the basis of 1995 figures.1 12.2).0 c 7.7 10.1). with 30 per cent of the total being in developing countries in 1997.9 1997 18.1 8.1. 1987-1990 only.6 20. Note: 2 .7 45.6 18.2 21. up from $88 million in 1990 (United States. 1993b and 1997a). Department of Commerce.Tr World Investment Report 1998: Trends and Determinants increases in the stock of developing countries (table I. not included in this table are the values of worldwide sales by foreign affiliates associated with their parent firms through non-equity relationships and the sales of the parent firms themselves. The regional distribution of inward FDI stock is approaching that of FDI inflows. Assets held by all foreign affiliates in 1997 were 3. because the number of foreign affiliates worldwide is probably understated considerably by available data (table I.0 b 16.6 12. The average assets of large foreign affiliates of United States TNCs were $132 million for 1995. almost comparable to their size at the beginning of the 1990s. based on FDI/TNC database and UNCTAD estimates.0 d 5. Italy.5 6.3 12.5 times as large as FDI stocks because a good part of them are financed by local loans and local shareholders as well as by finance raised in third markets (table I.2 24. Judging by available data. including small and medium-sized enterprises and firms from developing countries. however.0 c 0.3 30.3 16. the average size of foreign affiliates would still be $12 million.9 1. Germany.3). Japan and the United States (for sales).5 12. as they refer to fixed assets and intangible assets that are used for production purposes and to financial assets that entitle the firms to receive income.3). These assets indicate the capacity of foreign affiliates to produce goods and services.8 -0.6 27. those from the United States (for gross product) and those from Germany and the United States (for assets) on the basis of the shares of those countries in the worldwide inward FDI stock.4 5.4 6.3 The relative stagnation in the average size of assets owned by foreign affiliates worldwide suggests that more and more firms.7 13.2 2.

b w x x y 199 145 5 1 3 3 14 18 5 1 469 000 067 416 472 z 878 758 802 aa 154 139 733 050 /..Chapter I able foreign by economy available year Tab le I. 30 2 1 109 b . .2. .. 1 482 70 1 300 112 6 242 379 500 187 313 4 806 57 ... 3 . China India Indonesia Korea.... Republic of Pakistan Philippines Singapore Sri Lanka ab Taiwan Province of China Thailand Year Foreign affiliates located in economy a 96 620 63 789 54 2 2 2 1 9 11 1 1 2 5 6 5 2 875 362 000 012 200 351 445 798 040 630 259 809 809 551 609 d c e f g h i k h l 5 456 b 50 900 4 506 4 231 m 3 379 o 2 530 485 1 695 232 q 118 9 323 b 8 914 40 3 100 5 774 3 014 n 18 901 p 10 2 4 1 2 916 371 541 949 q 055 230 696 330 21 r 134 175 21 174 257 6 322 2 028 t 2220 225 287 8 420 109 1 183 v 123 6 045 353 1 792 3 900 1998 1996 1997 1996 1995 1995 1995 1990 1985 1993 1995 1997 1997 1997 1996 1991 1997 1997 1995 1995 1996 1993 1995 1995 1995 1990 1992 32 . 797 s .. East and South-East Asia China Hong Kong.... b y area and economy.. ... .. 302 . Number of parent corporations and foreign affiliates.. . latest a v ailab le y ear (Number) Parent corporations based in economy a 43 442 b 33 302 1996 1996 1997 1996 1996 1996 1991 1994 1995 1993 1997 1997 1997 1996 1995 1996 1995 1996 1995 1997 1996 1997 1996 27 846 897 1 110 5 000 1 200 2 078 7 569 . 10 u . . . 39 966 1 608 1 350 822 4 148 1 059 b Area/economy Developed De veloped economies Europe W estern Europe European European Union Austria Belgium Denmark Finland France Germany Greece Ireland Italy Netherlands Por tugal Spain Sweden United Kingdom j Europe Other W estern Europe Iceland Norway Switzerland Japan United States developed Other de veloped Australia Canada New Zealand South Africa Developing De veloping economies Africa Ethiopia Swaziland Zambia Latin America and the Caribbean Bolivia Brazil Chile Colombia El Salvador Guatemala Mexico Paraguay Peru Uruguay Developing Europe De veloping Eur ope Croatia Slovenia Former Yugoslavia South.

equity ownership by non-resident corporations and/or non-resident individuals. 92 z . Number of parent corporations and foreign affiliates. As of 1994.e.816 bank and non-bank affiliates in 1994 whose assets. 53 607 Foreign affiliates located in economy a 2 486 538 351 z 1 461 136 1 041 1 041 ad 151 151 12 1601 1 280 393 918 44 062 3 170 15 205 1 624 32 889 6 193 7 793 5 560 2 514 448 917 ae af ag ah ai Source: UNCTAD estimates.. As of October 1993. insurance and real estate industries in March 1996 (3. Includes joint ventures with local firms. The number of firms that are registered with the National Bank of Kyrgyz Republic. Represents 448 foreign affiliates in banking and 2. Of this number.. Number of foreign companies registred under DL600. 26 660 . Includes firms controlled by a foreign direct investor. Does not include holding companies abroad that are dependent on German-owned capital and that. As of 1991. Number of firms with foreign capital.551 bank and nonbank affiliates in 1992 with assets. The actual number of firms that are in operation was 3.730) plus the number of foreign affiliates in insurance and real estate industries in November 1995 (284). sales or net income exceeded $3 million. Estimated by Banque Nationale de Belgique. and the number of foreign affiliates in the United Kingdom. The numbers are probably understated because of the lags in identifying investment in greenfield sites and because some companies with a small presence in the United Kingdom and abroad have not yet been identified.2. Each affiliate represents a fully consolidated United States business enter prise. sales or net income exceeded $1 million. Of this number 21. Note: 4 . 66 12 58 s 20 s . The number of affiliates established during December 1990-Feburary 1998. i.517 are majority-owned foreign affiliates. The actual number of firms that are in operation was 387. Represents a total of 25 bank parent companies and 1. as definitions change. Only registered affiliates with the Estonian Commercial Register. hold participating interests of more than 20 per cent abroad (indirect German participating interests).. As of March 1997. and 709 non-bank and bank parent companies in 1994 whose affiliate(s) had assets. hold par ticipating interests in Germany (indirect foreign participating interests). Data are for the number of investment projects. Represents the number of foreign affiliates that received permission to invest during 1992-May 1998.. As of May 1998. which may consist of a number of individual companies. sales and net income under $3 million. The number of foreign affiliates not including finance. a b c d e f g h i j k l m n o p q r s t u v w x y z aa ab ac ad ae af ag ah ai Represents the number of parent companies/foreign affiliates in the economy shown. the data can vary significantly from preceding years. As of October 1993. Does not include the number of foreign-owned holding companies in Germany which.679 are are fully owned foreign affiliates. Includes joint ventures.959) plus the number of parent companies in finance.610 non-bank parent companies in 1995 and 60 bank parent companies in 1994 with at least one foreign affiliate whose assets. . and FDI into the United Kingdom conducted by the Central Statistical Office. This number covers all firms with foreign equity. by area and economy. 811 are majority-owned foreign affiliates . Represents a total of 12.161 non-bank foreign affiliates. The number of parent companies not including finance. registered with the Securities Exchange Commission from 1989 to 1995. while 159 affiliates have less than 10 per cent equity share. Data on the number of parent companies based in the United Kingdom. . Deviations from the definition adopted in the World Investment Repor t (see section on "definitions and sources" in annex B of this Repor t) are noted below. are based on the register of companies held for inquiries on United Kingdom FDI abroad. As of 1989. and 534 United States affiliates that are depositary institutions. Includes data for only the countries shown below. latest available year (continued) (Number) Area/economy W est Asia Bahrain Oman Saudi Arabia Turkey Central Asia Kyrgyzstan Pacific The Pacific Fiji Europe Central and Eastern Eur ope Albania Belarus Bulgaria Czech Republic Estonia Hungary Lithuania Poland Romania Russian Federation Slovakia Ukraine World Year 1995 1995 1989 1995 1997 1997 1997 1994 1994 1997 1998 1994 1997 1997 1998 1994 1997 1994 Parent corporations based in economy a 449 b . Includes both Danish and foreign parent corporations in Denmark. in turn. which may consist of a number of individual companies. as defined by that economy.. Less than 10. The number of firms that are registered with the National Bank of Kyrgyz Republic. As of May 1995. Each parent company represents a fully consolidated United States business enter prise. insurance and real estate industries in March 1996 (2. as data become available for countries that had not been covered before. in turn. 1. 357 9 9 ac 842 b .Tr World Investment Report 1998: Trends and Determinants able foreign by economy available year (continued) Table I. . sales and net income under $1 million. and 5.. Of this number.. insurance and real estate industries in December 1992 (272).034 non-bank parent companies.. or as older data are updated. Represents a total of 2.

Chapter I able distribution inward outward stock.2 100 World Source: UNCTAD.1 0.by a Year Assets Sales (Value added) foreign affiliates factor of 1.an estimated $9.3 100 Outward FDI stock 1990 1995 95.7 0.1 15.1 41.2 1.8 100 1985 95. sales per affiliate in 1995 were $100 1993 7 132 5 975 1 371 1 278 1994 8 361 6 624 1 574 1 455 million for United States foreign affiliates 1995 9 957 8 346 1 810 1 961 and $110 million for Japanese foreign 1996 a 11 156 8 851 1 950 . 1982-1997 services. East and South-East Asia The Pacific Europe Central and Eastern Europe 1985 72..1 0.are growing at a faster able Indicators production by foreign Tab le I.1 45.6 31.1 0.1 13.2 15.4 0.1 2.4.3 44. Thus.3 0.9 0.3 0.5 1. firms Gross product Exports of use FDI more than they use exports -.8 36.4 0.2 0.9 0.1 11.5 25. for 1992 6 300 5 325 1 411 1 241 example.8 4.2 50. Note: 5 . 8. profits (income of firms) and taxes (income of governments).6 8. Indeed.3 2.4).9 25.4 0.1 5.0 8.3 5. 1989 4 520 4 788 1 160 947 1990 5 625 5 204 1 394 1 149 although there is considerable variation in 1991 4 162 5 052 1 422 977 size of sales by home country.3 6.3 24.5 51.7 2.9 1.3 33.1 0.3.2 7.1 36.8 .0 100 1997 90.5 2.1 2.3 25.3 20.7 3. 1985. Sales of goods and services by foreign affiliates -. Germany.6 2.1 10.1.4 4.. If assets indicate the potential level of production.6 8.7 44.1 1.2.9 0.6 2.4 40.5 8.1 5.1 17.1 14. 1990.0 9. 8.6 2.3 2. Sales per 1988 4 027 4 180 1 017 891 affiliate worldwide are about $20 million. Indicator s of production by f oreign rate than worldwide exports of goods and affiliates. those from France.4 45.9 10.9 1.1 1. 1997a. turnover or sales indicate the use to which assets have been put.9 0.4 2. Regional distribution of inwar d and outwar d FDI stoc k.to service foreign markets.8 20. Thus. based on annex tables B.1 2. Japan.4 6. worldwide production-related data are estimated by extrapolating the worldwide data of foreign affiliates of TNCs from Germany and the United States (for assets).1 10.5 0.4 0.1 100 Region/country Developed De veloped countries Western Europe European Union Other Western Europe United States Japan Developing De veloping countries Africa Latin America and the Caribbean Developing Europe Asia West Asia Central Asia South.2 100 1997 68.4.1 and I.9 34. Italy.7 22.2 1.0 36. those from the United States (for gross product) and those from Japan and the United States (for exports) on the basis of the shares of these countries in the worldwide inward FDI stock.4 0. and in 1990 it was 1.2 0.3 and B.8 46. Commerce.9 6.5 1.5 trillion in 1997 -..5 11.6 100 91. Ministry of International Trade and Industry. 1998a).4 Source : UNCTAD estimates.1 100 70. Japan and the United States (for sales).3 4. Foreign affiliates Projection on the basis of the 1995 figures. the importance of sales by foreign 1982 1 869 2 440 559 . a The real contribution of enterprises to an economy can be measured by gross product or value added.2 28.6 20.6 50. affiliates (United States. 1983 1 885 2 395 547 569 affiliates relative to world exports is 1984 1 965 2 632 573 680 increasing: during the early 1980s the ratio 1985 2 272 2 533 604 698 of sales of foreign affiliates to world exports 1986 2 878 2 842 755 694 1987 3 403 3 519 846 740 was 1.3 0.7 0.3 7.6 3. 1995 and 1997 (Percentage) Inward FDI stock 1990 1995 79.2 2. Tab le I.6 39.6 0.6 27..4 trillion in (Billions of dollars) the same year (tables I.. which amounted to $6.7 .3 0.0 30.5 -.7 0.7 0. Department of a 1997 12 606 9 500 2 100 . as it is distributed in the form of wages (income of employees).

r o yalties and licence f ees.6). compared to about one-quarter during the latter half of the 1980s. b Worldwide expor ts are estimated by extrapolating the worldwide expor ts and licence fees are a measure -. Year 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 Export propensity of foreign affiliates c .1) and intra6 firm transactions are predominant.7 26. 1988 and 1998.7 31.5 4. 8 . for example. Department of Commerce.however of foreign affiliates of TNCs from Japan and the United States on the imperfect -. .9 Exports of all foreign affiliates as percentage of world exports b .5 24. ..3 5. Tab le I. In the case of China.1 5. 1987 and 1997 and Ministry of International Trade and Industry. Technology transfers are another a Worldwide value added is estimated by extrapolating the worldwide value aspect of the cross-border activities of added of foreign affiliates of TNCs from the United States on the basis of TNCs. Deutsche Bundesbank. of which intra-firm (per cent) Developing countries.e. 1986 and 1996 (Millions of dollars) 1986 Japan 1 230 58 .7 6. 6 .6 26..5). Receipts and payments of royalties the share of the United States in the worldwide inward FDI stock.. In calculating expor ts of Japanese affiliates.1 19.9 28.2 5. 2 908 . Japan and United States: receipts fr om patents.7).2 6. ..3 19. export data are adjusted to flows by TNCs.0 21.1 6. German y. .2 5.5).6.3 6.5 . the export propensity of foreign affiliates (i.8 27.6 25. Source : UNCTAD estimates.. based on Japan. able Importance production by foreign Tab le I. 1989 and 1998a.. Impor tance of pr oduction b y foreign affiliates. 1982-1997 (Percentage) Value added of all foreign affiliates as percentage of world GDP a 5.7 25.4). Transnational linkages between firms have become more important in acquiring and upgrading technology over the years because foreign affiliates have. Their value is increasing exclude those of wholesale affiliates to avoid possible double counting. 1992 and 1997d.4 22. Technology can also be acquired through the import of capital goods. able Germany from ro fees..5 22. accounting for between 52 per cent for Japan to 95 per cent for Germany (table I.. Foreign affiliates can also contribute to the host economy through exports. 23.. access to their parent companies’ R&D facilities and indeed to those of their entire corporate networks.3 23. of which intra-firm (per cent) Central and Eastern Europe of which intra-firm (per cent) Germany 778 92 671 92 74 93 33 94 United States 7 927 76 6 861 78 647 55 13 - Germany 2 453 95 1 971 94 415 97 68 94 United States 29 974 79 23 246 82 5 051 68 127 74 Source: a UNCTAD.4 21.7 6.3 5. They also accounted for an increasing share in world GDP: close to 7 per cent in 1997.7 28.8 22.0 5. the ratio of exports to total sales) has remained close to one-quarter in 1995 (table I. . Fiscal year 1995. Bank of Japan.. as compared to 5 per cent in the mid-1980s (table I. .5).Tr World Investment Report 1998: Trends and Determinants worldwide generated more than $2 trillion in value added in 1997 (table I. Region World of which intra-firm (per cent) Developed countries.6 27. 5 Since the mid-1980s.0 23.3 32. at double-digit rates (table I.3 27... c Share of exports of foreign affiliates in total sales of foreign affiliates.and especially joint ventures -. and United States.. 27. 1996 Japan a 6 443 52 3 525 .8 5.5.of the volume of technology basis of the shares of these countries in the worldwide inward FDI stock.4 6.9 26. at least in principle.8 6.performed quite well in this respect compared with domestic firms as a group.. They are estimated to have accounted for some one-third of world exports in 1995 (table I.3 . . foreign affiliates -..5 31.3 21. although in all cases the proportion of capital goods in total imports has declined (table I.

FDI flows The year 1997 witnessed a complex mix of economic changes around the world (UNCTAD. China: Mac hiner y impor ts and their share in total able Machiner imports hinery economic integration among imports. provided by China. during the past decade and a half. based on Inter national Tr ade Centre UNCTAD/WTO world GDP has remained ChinaTraders database. The degree of internationalization thr ough FDI and through trade . global integration seems to have proceeded faster through FDI than through trade. regional or global Enterprise levels. it can now also be measured Foreign affiliates 8 988 26 9 679 14 Fully foreign-owned firms 1 607 18 3 383 12 by FDI flows and stocks. same period (figure I. the scales used for the three panels are different. FDI continued to grow in all regions (figure I. 7 . For the Equity joint ventures 7 381 29 6 296 16 world as a whole. weak commodity and petroleum prices that affected the economies of Africa and West Asia. the ratio of FDI 1 803 26 883 10 stock (inward plus outward) to Non-equity joint ventures GDP has increased steadily since Domestic firms 7 491 12 4 694 7 State-owned enterprises 7 184 12 4 589 8 1980. There are.8).9) as well as in the pace at which FDI is growing. 2. FDI/TNC database. Thus. 1980-1996 (Percentage of GDP) Source : Note: UNCTAD. through through trade.7. Figure I. the ratio of world FDI flows Collective enterprises 42 8 91 4 (inflows plus outflows) to GDP Private enterprises 1 14 6 6 has also risen. the worst economic recession in Japan since the mid-1970s. by enterprise. 1993 and 1997 (Millions of dollars and percentage) countries has traditionally been measured by the relative 1993 1997 importance of international trade Value of Share in Value of Share in imports total imports imports total imports at the national.1). strong economic recovery in the European Union and Latin America. 1998a): the financial crisis in Asia and the halting of high economic growth in East and South-East Asia. of course.2).1. continued high economic growth in the United States.3 and table I.1). with some changes in the relative importance of different host countries (table I. noteworthy differences in the pace of integration among regions and countries (figure I. and the reversal of economic decline in Central and Eastern Europe for the first time since the end of central planning. but not steadily Other 264 13 8 1 (figure I. Statistics Department of relatively constant during the the Customs General Administration.Chapter I While the degree of Tab le I. The ratio of world Total 18 282 18 15 255 11 trade (imports plus exports) to Source : UNCTA D. Despite different and divergent performances in different regions reflecting these developments. impor ts. b y type of enterprise .

after a decline in 1996. FDI/TNC database.6 trillion. 9 despite lower global economic growth. FDI flows are expected to increase as well. as well as privatizations and further liberalization. In 1998.11 A major factor behind the FDI growth is the continued trend towards large-scale cross-border M&As. 8 .2. however.2 for details). that the definition of FDI underestimates the real size of investment by TNCs because it does not cover investment financed by funds raised in domestic or international markets (UNCTAD. 8 if funds from these sources are included. to $400 billion. FDI comparisons among regions corrected for market and population-size show a somewhat different picture from that based on absolute values of FDI flows. while outflows. However. World FDI flows today are nearly twice what they had been in 1990. The definition also obscures. FDI flows into Asia and the Pacific may at best remain the same as in 1997. to reach $424 billion (table I.Tr World Investment Report 1998: Trends and Determinants through Figure I.1). as well as Latin America and the Caribbean and Central and Eastern Europe. to some extent.7 the first time that the $400 billion mark had been reached and passed. because foreign affiliates themselves also make direct investments abroad (see box V. the total addition to the capital base of international production in 1997 may well have been $1. to reach a projected level of around $430-440 billion for both inflows and outflows. and some sevenfold their volume in 1980. the upward trend in world FDI flows set a new record in 1997: inflows grew by 19 per cent. the true identity of foreign investors.10 and decreases in FDI flows to some countries expected in 1998. It should be noted. Internationalization thr ough FDI and through thr ough trade in selected countries and regions (Percentage of GDP) Indeed. Most of the increase in FDI will probably be concentrated in developed countries. 1997a). which would be the first time since the beginning of the 1980s that FDI flows into that region did not increase. The Source : UNCTAD. rose by 27 per cent. The outstanding positions of the United States and Western Europe in FDI inflows in absolute values are obvious.

Chapter I United States and Western inflows.7 14. by Figure I.0 0. developing countries do not receive as much FDI as developed Source : UNCTAD.2 28.5 0. In the case of FDI outflows.1 0.0 47.2 1.becomes more important even than the United States if FDI as a percentage of GDP is considered.already relatively important as a home region in terms of the absolute size of outward FDI -. Regional distrib ution of FDI inflo ws and outflo ws.1 38.6 0. a Estimates.8 12. however.5 0.2 0.4 2.6 23.1 3.1 and UNCTAD FDI/TNC database. 9 .8 37.4 24.8 6.9).2 42.5 7.8 100 World Source: UNCTAD. Similarly. Tab le I.7 100 1997 58.7 27.1 100 Outflows 1995 1996 86.0 14. In contrast.6 0.3 2.9 0.3 26.8 18.8 46.9 49.7 22. based on annex tables B.1 20.7 0.0 0. East and South-East Asia -.5 1. South.1 11.9 29.1 4.4 4.8 0. There is also considerable change able distribution inflows outflows.1 0.4 3.000 GDP.0 0.2 100 1997 84. country rankings in terms of absolute flows of FDI and relative flows of FDI yield different results (table I. 1994-1997 (Percentage) Inflows Region/country Developed De veloped countries Western Europe European Union Other Western Europe United States Japan Developing De veloping countries Africa Latin America and the Caribbean Developing Europe Asia West Asia Central Asia South.3 22.2. countries.7 0.0 0.5 20.4 45.0 6.1 14.1 6.4 0.0 2.6 0.3 11. Not a single developed country figures among the top 30 recipients of FDI per $1.2 21. as are the top three outward investors.2 11.4 15. developed countries continue to be dominant both in absolute and relative terms. If FDI flows are adjusted for population size. by major region.1 12.4). FDI inflo ws.0 0.1 and B.2 0.4 100 1995 63.6 9. In terms of FDI inflows per capita.9 0.2 25.2 32.8 0.7 31.6 25.6 100 1994 85.5 2.1 0.9 37.9 0.2 0.1 35.3 14.0 0.000 GDP and almost a half of the top 30 outward investors are developing economies.3 100 1996 57.7 0.2 22.2 1.6 0.3 1. 1980-1997 Europe become less important (Billions of dollars) compared to others if values of FDI relative to market size (GDP) are considered (figure I.4 12. East and South-East Asia The Pacific Europe Central and Eastern Europe 1994 58.4 13.3 23.7 27. based on annex table B.1 100 85.7 20.0 1.9 1.6 0.6 27.3.8 0.0 -0.1 50.4 12.8 17.3 5. Among developing countries.3 2.2 4.3 29. simply because many of these regions have such small GDPs.1 0.0 42.7 12.6 45.1 0.8.3 -0.2 4. all developing regions (except for West Asia) become more important as recipients of FDI if judged by FDI flows per $1.2 14.4 39. half of the top 30 host countries are developing economies.

10 .Tr World Investment Report 1998: Trends and Determinants flows. relative to market siz e and population.4. As measured by GDP. a by region. size by Figure I. FDI/TNC database. 1996 Source: a UNCTAD. FDI flo ws.

6 170. of China Malaysia Finland Denmark China Austria New Zealand Chile Thailand Panama Por tugal Israel Ireland 74. of Korea Estonia Iceland 0.37 0.6 2.5 521.0 22. China Panama Bermuda Netherlands Singapore Malaysia Switzerland Norway United Kingdom Belgium & Luxem.5 Cayman Islands 15937.000 GDP Per capita (Dollars) 4474.58 0.8 579.6 244.90 0.7 3.8 361.11 0.7 203.1 11.5 2.0 14.69 0.29 0.2 7.59 0.4 3.9 179. China 424.11 0.5 5.26 1.1 1.6 Dominica 253.5 US Virgin Islands 3867.1 9. Ireland Israel India 76.5 285.20 0.39 1.83 0.3 1.5 4.4 Aruba 1190.9. Finland Seychelles Botswana Sweden France New Zealand Malta Taiwan Prov.93 0.5 Netherlands 497.1 30.62 0.5 5.15 0.9 1595.7 3.29 0.5 Trinidad & Tobago 242. China Bermuda Singapore Switzerland Netherlands Norway Belgium & Luxem.43 0.8 Seychelles 402.1 4.81 0.3 Switzerland 483.82 0.1 New Zealand 1019.64 0.2 6.62 0.5 3.20 0.9 Singapore 3284. FDI flo ws per $1.30 0. 1996 outflows FDI outflo ws Per capita Economy Economy (Dollars) United States United Kingdom France Germany Hong Kong.8 1671.86 0.59 0.5 40.16 0. Vincent & Gren.59 0.16 0.68 0.1 0.7 United States 287.4 Malaysia 227.5 2.09 Hong Kong. of Korea Taiwan Prov.9 186.19 0.11 0.7 Antigua & Barbuda 284.9 5.8 4.able world’ larg orld’s for flows.2 5.4 8.7 0. of Korea Bermuda 32812.8 0.000 GDP and FDI flows per capita.46 1.8 179.8 6.9 131.10 0.1 102.27 0.20 0. flows flows Tab le I.1 11.66 12. Namibia Source : UNCTAD.4 Israel 424.1 Austria 477.3 129.2 Equatorial Guinea 917.6 3. Brazil Singapore Mexico Netherlands Spain Canada Indonesia Sweden Australia Argentina Malaysia Poland Chile Norway Austria New Zealand Peru Switzerland Italy Colombia Hong Kong.4 United Kingdom 445.8 34.57 0.00 0.4 23.1 4.80 3.9 281.1 4.4 177.0 3.49 Per $1.8 inflows FDI inflo ws Absolute value (Dollars) 23.28 0.5 2. based on FDI/TNC database.7 3.5 26. of China Australia Chile Canada Denmark Germany Zimbabwe Nigeria Ireland United States Rep.55 0. Grenada Bolivia Seychelles Trinidad & Tobago Botswana Peru China Angola New Zealand Chile Malaysia Belgium & Luxem.4 6.1 Iceland 302.8 Chile 282.6 Norway 909.2 Hong Kong.39 0.1 1346.5 Bahamas 311.8 Sweden 622.0 347. 1338. Italy Australia Norway Spain Sweden Singapore Rep.5 6.4 1.0 173.1 701.4 6.7 4.7 Hong Kong.8 3. The world’s lar g est host and home economies f or FDI flo ws.9 0. Finland United Kingdom Sweden France Denmark Germany New Zealand Australia Panama Canada United States Iceland Ireland Japan Malaysia Taiwan Prov.50 1. Chapter I 11 .11 0.5 2.84 3.58 0.15 0.18 1.7 1480.51 0.10 0.9 0.3 2.17 0.50 0.9 Ireland 688.6 8.0 Economy Economy ($billion) Econom y Economy (Dollars) Economy Economy Absolute value Per $1. of China Seychelles Austria Malta Spain Israel Italy Rep.6 320.13 0.0 108.7 France 377.76 0.0 583.2 5.14 0.9 793.6 483.8 26. China Japan Netherlands Switzerland Canada Belgium & Luxem. China Russian Fed.7 Australia 298.4 2.4 23.4 29.000 GDP Rank Econom y Economy ($billion) Economy Econom y 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 United States China United Kingdom France Belgium & Luxem.70 0.0 Saint Kitts & Nevis 404.11 0.5 8.09 0.4 Equatorial Guinea Bermuda Azerbaijan US Virgin Islands Guyana Viet Nam Cambodia Vanuatu Singapore Malta Kazakhstan Lao PDR Solomon Islands Saint Kitts & Nevis Dominica Latvia St.4 337.7 2718.2 5.6 Belgium & Luxem.2 Malta 813.8 3.

a Number of countries with percentage ratios of the level or range specified.Tr World Investment Report 1998: Trends and Determinants in the ranking of individual countries with respect to inward and outward FDI if relative indicators are used. 12 On a regional basis. In addition there are 8 countries relation to gross fixed that have ratios below 0 per cent due to negative FDI inflows. the ratio of FDI to gross fixed capital formation provides a closer indication of the role of TNCs in a given economy. Inflows Developed countries and Central and Eastern Europe Developed countries. More specifically (table I.13 (a) i. The magnitude of this role Figure I. all developing regions (except West Asia) receive more FDI in Source : UNCTAD. see also chapters V and IX): 12 .g.5). do developed regions (figure I. Western Europe saw its share decline noticeably in 1996 and has not yet regained it (table I. including the countries of Western Europe. Although there was a significant increase in FDI inflows into Japan in 1997. did not surpass 1 per cent in that year.8 and figure I. most of them developing countries (51). Israel. due to large inflows through large-scale M&As. Rwanda) to more than 30 per cent (Botswana. Japan.5). All this implies that one has to look beyond absolute levels of FDI in order to understand the significance of FDI for different regions and countries. Nigeria. to reach $233 billion in 1997 from $195 billion in 1996. There are 63 countries that fall below the level of the world average of 5. Bangladesh. Japan’s share in world FDI inflows. While the United States has been increasing its share in world FDI since 1996.5. Japan and several other countries (Australia. Central and Eastern Europe’s share in world FDI inflows remained below 5 per cent in 1997. New Zealand and South Africa) continued to absorb nearly three-fifths of world inflows. which had been minuscule during the preceding four decades.8). Does not include countries (34 in all) for capital formation than which data on gross fixed capital formation are not available. Singapore) of the share of FDI in domestic gross fixed capital formation.3 per cent (figure I. 1994-1996 inflows percenta centag gross fixed formation.3. however. varies from country to country. ranging from small (e. FDI inflo ws as per centa g e of gr oss fix ed capital f ormation. Flows into developed countries have risen substantially between 1996 and 1997. North America (Canada and the United States). FDI/TNC database. As FDI inflows constitute a part of total capital investment in host countries.

Chapter I • United States. Official development assistance (ODA) to the least developed countries (LDCs) -. FDI in Japan amounted to more than $3 billion in 1997 -. Other developed countries.14 Western Europe. In Germany. The former. by far. Central and Eastern Europe. It should be noted that. as during the previous three years. a level comparable to that achieved by Latin America and the Caribbean in the early 1990s. Flows into the United States were. however. the Netherlands. inflows rose by one half in 1997.the group of Source : UNCTAD. • • • ii. Foreign investors responded favourably to improvements in the European Union’s economic performance and the strengthening of its macroeconomic indicators in time for the introduction of the Euro in 1999. In 1997. With macroeconomic indicators such as the GDP growth rate. While the volume of overall flows grew on average by 16 per cent annually in nominal terms over the period 1990-1997. which were 10 per cent of inflows in 1997. Inflows rose due to.16 by 1997. compared to 84 per cent in 1990 and 82 per cent in 1995. to $19 billion. 1998 and UNCTAD.a group of economies in transition -. M&As were the principal modes of entry of FDI to the United States. FDI data for Japan now include reinvested earnings. Capital flo ws to all de veloping countries. particularly inducing M&As by foreign firms. have declined in relative importance: at the beginning of the 1990s.6. some 90 per cent of investment outlays in foreign affiliates were made through acquisition of United States businesses. based on World Bank. surpassing their level of 1995. inflation and employment showing their best performance in decades. 1990-1997 Developing countries are recipients of both official and private capital flows. reflecting especially an M&As boom in United States high technology (including informatics) industries. unlike 1996.had more than doubled in 1995. accounting for more than one-fifth of world FDI inflows. for example. FDI flows into the United States exceeded $90 billion in 1997. after a dip in 1996. and low asset prices. but no more than about half the flows into. 1998). 13 . because of a change in the coverage of FDI statistics since 1996. official finance accounted for more than a half of the flows to developing countries (World Bank.a record level of inflows for that country. the largest to any individual country. TNCs were also beginning to respond to the impending single currency in the European Union. the response of foreign firms to the ongoing liberalization measures in the retail and financial industries. that share was barely 15 per cent (figure I. official finance declined by 3 per cent annually (World Bank.6). Developing countries flows developing Figure I. Investment flows into the European Union reached $108 billion in 1997.15 The United Kingdom continued to be the largest host country for FDI inflows in 1997. 1998). the absence of large divestments. FDI flows into Central and Eastern Europe -. Australia continued to receive large-scale investments. among other reasons. After a decline in 1996. leaving the second largest host country (United Kingdom) behind by more than $50 billion. new FDI was again (as in 1996) exceeded by FDI withdrawals.

/. it is attracted not so much by the prospect of long-term growth as by the prospect of immediate gain (box I. Among private foreign capital flows. The LDCs apart. b y type of flow. especially if these are parts of integrated international production systems. commercial bank loans displayed the highest volatility (0. on average. as reflected by the fact that ODA accounts for the major share of their net capital inflows -. 1990-1997 made on a regional or global scale. TNCs are normally more interested in longer-term profits from the production of goods and services. and declined by 14 per cent in nominal terms (11 per cent in real terms) in 1996.1). The greater overall stability of FDI flows in comparison with portfolio investment flows can be attributed to several factors. the picture indeed looks different for private flows (figure I. based on World Bank.i. unlike FDI.71).7. portfolio investment is more volatile than FDI since.7). The volatility of foreign portfolio investment and FDI flows into developing countries Repeated episodes of financial turmoil have focused international attention on the problem of volatility of private foreign capital flows and the extent to which that volatility creates an unstable environment detrimental to economic development. for roughly one-tenth of private capital flows to developing countries over the period 1990-1997. 14 . the coefficient of variation based on annual data has been higher for foreign portfolio investment than for FDI during 1992-1997 (box table). 1997a). Divestment and reversibility are thus more difficult for FDI than for portfolio investment.and this variety might be expected to reduce the risk of “herd” behaviour. Box I.43) a and FDI (0. The motivation to invest in the case of FDI is typically based on longer-term views of the market. 1998. portfolio Source : UNCTAD. which can be disposed of easily by selling in financial markets. the growth potential and the structural characteristics of recipient countries.e. Mexico is a case in point: even when portfolio investment fell sharply in Mexico in 1994-1995 during the peso crisis.remained stagnant from 1990-1995. while portfolio investors are normally more interested in quick financial returns on their investments (UNCTAD. Chile and the Republic of Korea. including Brazil. and UNCTAD investment for about a third (box I. volatility coefficients were higher for FDI than for portfolio investment during the period under consideration. Direct investors may also have a variety of motives -. Total priv ate flo ws to de veloping investment decisions are increasingly by flow countries.1. FDI was more or less sustained (see chapter VIII). as FDI is made through the establishment of production facilities..Tr World Investment Report 1998: Trends and Determinants countries most in need of such flows. b For most countries. in most of the cases. they may be seeking markets or resources or efficiencies -. or the acquisition of existing facilities in recipient countries. FDI for about a half of such flows. as measured by the coefficient of variation.35) (box table). followed by total portfolio investment (0..2) and FDI/TNC database. The growing importance of private flows reflects the trend towards liberalization and globalization in the areas of investment and finance. Moreover. and is thus less prone to reversals in response to adverse situations if these are perceived to be short term. Commercial bank loans accounted. it is difficult to dissolve or sell them at short notice. it has shown greater volatility than FDI (box table). During the period 1992-1997. For a few countries. An analysis for 12 major developing economies and economies in transition shows that. Barriers to capital movements have been abolished in many countries and private flows developing Figure I.

68 0. c Some channels through which portfolio investment takes place enforce greater stability than others because of their specific structural and regulatory characteristics. therefore. investments made by venture capital funds tend to have a long-term duration.63 0.8 29.52 0.2 63.52 0.Chapter I (Box I. 1992-1996. based on official national sources.1 0..6 3.2 10.1.46 1. Volatility of foreign portfolio investment and FDI flows in selected developing countries and economies in transition.8 2. data provided by IMF and UNCTAD. of FDI FPI Mexico FDI FPI Philippines FDI FPI Singapore b FDI FPI Thailand b FDI FPI Uruguay b FDI FPI Coefficient of variation a 100.96 0.01 0.1 0.6 2. continued) Portfolio investment is not unrelated to the growth of the corporate sector of recipient countries.4 2.8 21.7 1. Portfolio investors’ strategies combine with the problems of asymmetrical information and the inherent volatility of emerging markets and make portfolio investment more prone to “herd” behaviour. a Defined as the standard deviation divided by the mean.2 31. 1992-1997 Average flows (Billion dollars) Region/country All developing countries FDI FPI Equity Bond Commercial bank loans Argentina FDI FPI Brazil FDI FPI Chile FDI FPI China b FDI FPI Hungary c FDI FPI Indonesia FDI FPI Korea.51 0.31 0.35 0.9 1.57 0. need to liquidate their investments at short notice.0 6.65 Source: UNCTAD. thus allowing some insulation of domestic Volatility Box table.3 0. January through August only.3 10. Closed-end funds are not required to meet redemption and do not.3 11.3 1. 15 .51 0.36 0.9 3.6 1.71 0.71 0..19 0.4 11.6 4. Note: FPI = foreign portfolio investment.2 0.38 0.3 33.40 1.38 0.47 0. Depositary receipts are traded in foreign markets.46 0. For example. but it is more affected by short-term fluctuations in financial markets that influence investors’ expectations of capital gains.9 8.9 2.7 6. b /.25 0. Rep. FDI/TNC database.33 0.57 1.4 0.22 0.41 1.71 0. c For 1997.43 0.1 1.

d As noted. rather than through equity or intra-company loans. see UNCTAD.8. with a relative variance four times that of FDI flows (UNCTAD. see UNCTAD. indeed.the subregion which has accounted for the dominant share of FDI in developing regions in the past decade or so -. the low volatility of portfolio investment can be explained by controls imposed on short-term capital inflows. Examples include the expansion of Japanese international production financed through FDI in the latter half of the 1980s when the yen had appreciated. showed that the latter fluctuated more widely. (Both in 1996 and 1997. For Chile. Until 1997. the analysis indicated that. In 1997. 1998c. they accounted for close to two-fifths or $149 billion of world FDI inflows. On the whole. and will be abolished by the end of 1998. This could be due to various factors. to investment that provides financial capital to an enterprise in a country other than that of the investor. Changes in exchange rates can also affect the way in which international production is financed and hence the size of FDI flows at any given time. e In Brazil. for example.) Developing countries have. there have been significant changes in the pattern of FDI flows into developing countries. p. A similar analysis comparing the volatility of FDI and foreign portfolio equity investment. one component of total portfolio flows to emerging markets during 1986-1995. high interest rates in the United States during the 1980s encouraged United States firms to finance their capital expansions abroad by borrowing in recipient countries.) However. despite the financial crisis that hit several East and SouthEast Asian economies during the second half of the year.a region that had continuously claimed an increasing share of FDI among developing countries since the early 1980s and had received the largest share among the developing regions in 1996 -. which minimized the volatility of portfolio equity investment. Flows into South. Chile and the Republic of Korea. but does not involve any management control in the enterprise (UNCTAD.lost in relative importance in 1997. FDI flows into developing countries were larger than those into Western Europe.108). For a detailed analysis of portfolio investors’ behaviour and strategies. 1998d. it should be noted that FDI as currently measured contains elements of financial flows that can be affected by movements in interest rates and exchange rates in both source and recipient countries. a b c d e Foreign portfolio investment refers. the volatility of portfolio investment was lower than that of FDI. leading both to massive withdrawals in a crisis as well as to rapid recovery once confidence is restored. portfolio investors have a greater tendency to take concerted action. Major trends in various developing regions are as follows (table I. American depositary receipts and global depositary receipts (UNCTAD. 1997a). twice the level they received in 1993 and tenfold the level in 1985. TNCs might simply postpone their decision to invest. in an environment where exchange rates or interest rates are volatile. For example. substantial outflows of portfolio investment during the last quarter of 1994 and the first quarter of 1995 were followed by substantial inflows in the first half of 1997. two common components of FDI outflows. Nevertheless.1 (concluded) markets from external turbulence. investment funds (mutual funds and closed-end funds). 1997a). Developing Asia -. a higher variation coefficient for FDI is likely to have been caused by recent increases in FDI through privatizations. Source: UNCTAD. by about $30 billion. In Mexico.increased slightly in 1997. for Brazil. the Republic of Korea applied limiting regulations to foreign equity participation in companies listed in the stock market. Moreover.3 and chapters VI-VIII): • Asia and the Pacific. Even though there was a modest decline in inward investment in the five countries most affected by the financial 16 . however. There was a corresponding increase in the share of Latin America. (For details on regulations on foreign portfolio investment in the Republic of Korea as well as 24 other emerging market economies. figure I. It can be channelled to recipient countries through venture capital funds.Tr World Investment Report 1998: Trends and Determinants Box I. and to 55 per cent in April 1998. East and South-East Asia -. become increasingly attractive for foreign investors. 1997a. in principle. This percentage was gradually lifted from 10 per cent to 26 per cent in November 1997.

five economies held the largest amounts of equity funds (China. Mexico.Chapter I crisis. East and South-East Asia in FDI per capita (figure I. attracting an additional $12 billion over 1996.521 and $139 billion to 1. Brazil. 1997c). Recent trends are. Indonesia. Reflecting the impact of the financial crisis. rivalling and even surpassing South.2. the Republic of Korea and Indonesia also relied increasingly on bonds and notes. only the Republic of Korea and Thailand attracted more portfolio investment than direct investment. and particularly Mexico. • Latin America and the Caribbean. Data were collected from national and international sources for the following countries: Argentina. Brazil. Mexico. followed by Latin America (24 per cent). d it appears that countries in Latin America (except Chile) generally rely more on foreign portfolio investment than on FDI: on average.from $68 billion to $38 billion.7). Thailand and Uruguay. partly as a result of the reinstatement of special fiscal incentives to foreign investors in 1997. Central and Eastern Europe (15 per cent). and Africa and West Asia (3 per cent). most equity funds targeting countries in other developing regions increased in value in 1997. Flows into India also increased. UNCTAD.the magnet for FDI in the region -. the decline was due almost entirely to a fall in the value of Asian funds -. b Despite the decline in value in 1997. India. 17 .453 and $122 billion between 1996 and October 1997. in Central and Eastern Europe. Box I. Chile and Mexico).4). China. Thailand. based on information provided by Micropal. In fact. c Based on detailed data for 13 countries. the Russian Federation dominated. based on information provided by Micropal.another oil-producing subregion -. characterized by large year-to-year fluctuations. Singapore. FDI in West Asia has been lagging because of low demand for oil -. however. East and South-East Asia still held (at least until October 1997) the lion’s share of total regional and country funds (58 per cent). the region re-emerged as an important host for FDI. Czech Republic. Flows into the Pacific remain at a low level. mostly in Latin America. However. Central Asia -. and protracted debt negotiations with their commercial creditors before they were again able to tap international capital markets. With only a negligible impact of the financial crisis in Asia on the region. The number and net asset values of emerging market equity funds decreased from 1. These contrasting outcomes partially reflect the more serious systemic risk that emanated from the 1980s crisis. regained access to international capital markets. Chile. South. the continuation of the integration process in MERCOSUR.despite some remarkable efforts by countries in that region to improve their FDI climate (UNCTAD. Republic of Korea. inflows in 1997 increased over those of 1996. e a b c d e This can be contrasted with the debt crisis of developing countries in the 1980s: it took seven or eight years for the countries affected. Argentina. the largest funds were concentrated in three countries (Brazil. Hungary. in Latin America. Philippines. there was again a reduction of about 6 per cent in portfolio flows to developing countries. but did not reach the levels of the early 1990s. ibid.began to attract large-scale oil-related FDI in 1995 and is now a larger FDI recipient than West Asia. because of the onset of the financial crisis in Asia. following the onset of the Mexican crisis. Republic of Korea. In Asia. as emerging market economies. there was a marked slowdown in portfolio flows to developing countries in 1995. and privatization programmes on stream in many countries. their inward portfolio investment flows have by far exceeded their inward FDI flows since 1992. a In 1997. and in Africa. Taiwan Province of China and Thailand). South Africa was the dominant country in terms of size of equity funds held. which were mainly allocated to the corporate sector. This region was the star performer among the developing country regions in 1997. investment in China compensated for that decline. flows increased strongly the following year. Foreign portfolio investment: recent trends The importance of foreign portfolio investment in developing countries has increased since the early 1990s (text figure I. In particular. Among the six Asian countries in the list. With new investments in Saudi Arabia and low but constant flows of FDI to other countries. All data in this paragraph are calculated by UNCTAD.

despite a decline of FDI to Asian LDCs from neighbouring countries affected by the financial crisis.Tr World Investment Report 1998: Trends and Determinants • Africa.8. 18 . mainly made outflows by Figure I. which was 0. on account of its oil deposits. • (b) Outflows Developed countries still account for the bulk of world outflows. as well as increased interest by member states in the single market in the • Source : a UNCTAD.8): • United States. In particular. This is low even relative to their market size as measured by their GDP.8 billion. LDCs that received higher inflows in 1997 included Bangladesh. The group of 48 LDCs received FDI inflows amounting to just $1. In fact. mainly due to decreased FDI by investors originating in South. and Angola. Noteworthy aspects of FDI outflows in 1997 from major regions are as follows (table I. Because of relatively large increases in FDI flows into a few countries. the record FDI flows in 1997 were mainly caused by significant increases in equity investments.8 and figure I. based on annex table B. sustained by higher economic growth at home as well as in the major host regions of United States FDI. FDI outflo ws b y major region. Because of this. The LDCs. As with inflows. on account of improved economic performance. European Union FDI outflows in 1997 were also affected by the growth of the main host regions for the Union’s FDI -. (Billions of dollars) European Union.8 per cent of world GDP. the two major traditional host regions of United States FDI. or 0. Uganda and the United Republic of Tanzania. 1980-1997 through M&As.5 per cent of world FDI inflows in 1997.the United States and its own region. the LDCs as a group could maintain almost the same level of FDI in 1997 as in 1996 (a record year). because of recent discoveries of natural gas. Figures for 1997 are estimated. flows into Latin America and to the European Union. Recent macroeconomic improvements in the continent bode well for FDI in the region but they have not yet led to significantly increased flows. Continued weak demand and low prices for commodities served to dampen FDI in the primary sector. On the other hand. Latin American TNCs gained in importance as foreign investors. East and South-East Asia.1 and UNCTAD FDI/TNC database. Although more than a half of United States outflows of FDI are financed by reinvested earnings. still the key sector influencing the level and composition of FDI in Africa. The dominant position of the United States in outward FDI was further strengthened in 1997. all of the member states in the European Union recorded growth rates in 1997 that were equal to or higher than those in 1996. the importance of developing countries with respect to outflows decreased somewhat in 1997. increased significantly.

particularly within the region. Indeed. Thus. pushing the record level of the annual value of cross-border M&As beyond that of 1996. 1985-1997 Source: UNCTAD. which absorbs the bulk of FDI from that economy. Some of the firms based in this region are global players (e. The relationship between cr oss-bor der M&As and FDI flows. however. Mergers and acquisitions In 1997.g. Chile and Mexico (as well as some tax-haven economies) surpassed one billion dollars per country. Equity investment increased in 1997. Hong Kong Special Administrative Region of China (hereinafter “Hong Kong. privatization and regionalization have encouraged Latin America’s TNCs to increase investments abroad. Coupled with high regional economic growth. the largest host country in the region. The economic recession and the financial problems of major Japanese banks did not start affecting FDI outflows from Japan seriously in 1997. the share of intraregional flows increased in 1997. Latin America.9). Companhia Cervejaria Brahma of Brazil). is emerging as a large investor in the region. FDI outflows reached a record $9 billion. as had happened several years before. also decreased significantly. cross-bor oss-border Figure I. representing the highest share attained in the 1990s (figure I. In the principal outward investor subregion of East and South-East Asia. outflows from the Republic of Korea.7 and UNCTAD FDI/TNC database. Taiwan Province of China. China”) continued to invest mainly in China. Thus FDI inflows into the major host countries of intraregional investments by TNCs based in these countries such as Viet Nam and Myanmar declined. Cross-border M&As accounted for about one-quarter of all M&As worldwide (figure I. European Union TNCs directed more FDI flows to countries within the region in 1997 than in recent years. based on annex table B.10). having risen for the past several years. • • 3. flo ws. Cemex of Mexico) but most are still regional firms (e. they are. Reinvested earnings accounted for about one-fifth of total FDI outflows from Japan. following the announcement of the date of completion of the single market in 1987.18 Asia and the Pacific. total cross-border M&A transactions worldwide amounted to some $342 billion.Chapter I light of the introduction of the Euro in 1999.g. On the other hand.17 • Japan. relatively unscathed by the crisis. Cross-border M&As accounted for the bulk of the increase in FDI flows. investment outflows from Japan increased in 1997. Liberalization. FDI by firms from Brazil. Outward FDI from other countries affected by the financial crisis. their value in relation to total FDI inflows rose from 49 per cent in 1996 to 58 per cent in 1997.9. 19 . very likely to decline in 1998. such as Thailand and Malaysia (relatively large investors within the region). following a decline in 1996. declined for the first time since 1988 as a result of the problems faced by Korean firms caught in the Asian financial turmoil.

1).7 billion in 1995 to $2. other countries (especially the United Kingdom.11. and telecommunication and media industries (figure I.12). these mega deals accounted for about a half of global M&A transaction values in 1997. Inc. (Majority purchases are transactions in which the foreign investor acquires more than half the voting securities of the resulting business. Developed countries continued to account for about 80 per cent of all cross-border M&A sales. France and Germany) also play an important role (figure I. from $59 billion to $86 billion and $161 billion. During 1995-1997.I. was valued at $18. While firms from the United States continue to account for the single largest share of large-scale cross-border M&As.8 billion in 1997. the average size of large-scale crossborder M&As increased from $1.10. (New York) market.11). Cr oss-border and all M&As in the w orld value of M&As was due to largescale cross-border M&A deals. a their position in FDI Acquisitions exceeding $1 billion. and about 90 engag larg cross-bor oss-border Figure I. the growth of large-scale cross-border M&As by firms based in Switzerland is impressive. a 1995-1997 m a j o r i t y p u rc h a s e s . Principal home countries of firms enga g ed in lar g e cr oss-bor der per cent of cross-border M&As. Inc. Source : UNCTAD. as compared to and UNCTAD 1996a and 1997a.) D e v e l o p i n g countries remain in a relatively unimportant position in the cross-border M&A Source : UNCTAD. between Zurich Versicherungs GmbH and BAT Industries PLC-Financial.4 billion (annex table A.13). and their value. banking and insurance became the dominant industry for large M&As. based on data provided by Secur ities Data compared to one-quarter in 1995. (New York).Tr World Investment Report 1998: Trends and Determinants Most of the increase in the Cross-bor oss-border world Figure I. in all of which companies face severe competitive pressures in global markets. Large-scale M&As were concluded mainly among developed country TNCs. respectively. In fact. flows (figure I. chemical and pharmaceutical. Company. In 1997. based on data provided by Securities Data Company. The largest cross-border deal in 1997. Large cross-border M&As are concentrated in the banking and insurance. In addition. (Percentage of total value) totalling $236 billion in 1997. The 20 . The number of such deals worth more than $1 billion increased from 35 in 1995 to 45 in 1996 and to 58 in 1997.

resulting in even larger TNCs.19 Indeed. decline to 5-10 by a Only M&As in which the foreign investor acquires more than a half of the voting securties are included. majority M&A sales in South. holding.7). based on data provided by Securities Data Company.12. Significant increases in M&A sales in Latin America and in Central and Eastern Europe were also recorded in 1997. Inc. in entering markets through FDI. considering all cross-border M&A purchases including minority deals. Major tar g eted industries in lar g e cross-border M&As. However. are typical examples 1993-1997 of industries in which such a concentration trend can be observed (see figure I. in particular after the 1997 financial crisis.8) in 1997 or only a half of their share in FDI outflows -. or acquisition Source : UNCTAD. mainly on account of privatization. a b y group of countries. based on data provided by KPMG Corporate Finance. seem to impel other major TNCs to move towards restructuring or making similar deals with other TNCs. (New York) and UNCTAD 1996a and 1997a. the doubling or tripling of M&A sales in Brazil and the Russian Federation is clearly linked to privatization. South. developing countries again account for less than they do in world FDI inflows. In the automobile industry. East and South-East Asia have been increasing recently. for example. Among developing countries.suggests that TNCs from developing countries prefer the greenfield mode.13. As in the case of outflows. 2010. telecommunications and financial industries Cross-bor oss-border purc by group Figure I.14 for capital links in the automobile industry). the total number of major automobile makers may well Source : UNCTAD. East and South-East Asia accounts for the bulk of developingcountry cross-border M&A purchases. of minority sharea Acquisitions exceeding $1 billion.13 and annex table B.Chapter I relatively low share targ larg cross-bor oss-border Figure I. developing countries accounted for a share almost equal to their share in FDI outflows. an upward trend in M&A sales by developing countries and countries in transition is noticeable. The pharmaceutical. a 1995-1997 of developing (Percentage of total value) countries in majority M&A purchases -about 8 per cent (annex table B. For example. The result is a change in industry structure. One recent feature is that M&As among large or dominant TNCs. On the sales side of majority M&As (figure I. automobile. from its current 21 . Cr oss-border M&A sales and pur c hases.

21 accounting for about a quarter of the $300 billion market.Tr World Investment Report 1998: Trends and Determinants number of 15.1). Merger.I. Banking. by the conclusion of WTO’s financial services pact in December 1997 (see chapter III). Vauxhall Opel (Sweden) Saab Rolls Royce Volkswagen (Canada) CAMI Nissan Diesel Jaguar Kia Mazda Ford Aston Martin Audi Skoda (Czech Republic) Chrysler Hyundai Mitsubishi Rover Daimler-Benz BMW Suzuki Maruti Udyog (India) Keys: Acquisition (including minority acquisitions).14. Possible acquisition (1998). many markets are now controlled by a small number of firms.20 In the pharmaceutical industry. there has been a string of M&As among large firms. The value of cross-border M&As in the services sector has been larger than in the manufacturing sector every year since 1995 (figure I. finance and insurance industries accounted for industry. a 1998 Republic of Korea United States United Kingdom Japan Germany Others Daewoo Isuzu Nissan G. Unlike in the late 1980s.22 In both industries. Cross-border links among major TNCs in the automobile industry. Increasing M&As in the services sector in general and in financial industries in particular reflect ongoing liberalization exemplified. M. most of these transactions were concluded by investment bankers or brokers whose purpose is to seek capital gains rather than to expand into unrelated business areas. a Lists only the automobile TNC that have cross-border capital links. liberalization and deregulation are the other main factors behind the dramatic increases in M&As in both developed and developing countries. Does not include technology agreements. or of firms that have similar businesses). among others.15). The trend towards M&As is also accelerating the sale of non-core operations or affiliates by firms and the acquisition of similar operations from other firms (of divisions or affiliates. Source: UNCTAD. In addition to the strategic considerations of firms. Even though about one-fifth of the largest deals (13 of 58 cases) in 1997 were made among firms whose businesses were unrelated (annex table A. This indicates a strategic shift by TNCs to focus on their core activities. 22 . with seven firms having sales of over $10 billion each. there are fewer deals among unrelated firms. Figure I. based on information provided by Gendai Advanced Studies Research Organization (Tokyo).

Sectoral distrib ution of cr oss-border about one-quarter of the value of majority M&As. (Percentage of total value) Telecommunication is another industry that has been significantly liberalized. This in turn has led to increases in R&D expenditures and the speed with which new products are developed and moved to market. During the 1980s and 1990s.254 inter-firm technology agreements were recorded in the MERIT/ UNCTAD database. Underlying the upsurge in inter-firm technology agreements are a number of changes in the pattern of production and competition. The value of cross-border M&As is therefore small. firms is not normally allowed in this industry.15. 2000. five of the top 58 largest cross-border M&As were in this field in 1997 (annex table A. based on annex table B. code sharing -. Product life cycles have thus shortened and the costs.rather than outright mergers. risks and uncertainties of keeping up with the technological frontier or moving beyond it have increased.an industry that is beginning to be opened up to foreign firms in many countries -. p. majority M&As do not figure as highly as in total M&A transactions.9. 1980-1996 (Number) Source : MERIT/UNCTAD database. it has become the second largest industry.is another area in which large-scale M&As have taken place recently. A subset of these agreements involve technology-related activities (UNCTAD.9). it has attracted substantial FDI.24 with the number of such agreements rising from a yearly average of less than 300 in the early 1980s to over 600 in the mid-1990s (figure I. To respond to these new gro inter-firm technology Figure I. in M&A transaction values (annex table B. including FDI from other industries (such as the software industry and the construction industry). Inter-firm technology agreements Inter-firm Inter-firm agreements include a wide variety of arrangements between firms for R&D as well as for the production and distribution of goods and services.9). Prospects for cross-border M&As in telecommunications are still high. The gr o wth of inter -firm tec hnology a greements. 23 . after banking and finance. Over the period 1980-1996. a total of 8.16. In fact. 1997a. For example. and in aviation in particular. Some 650 such agreements were recorded in 1996.16).for example. however.Chapter I distribution cross-bor oss-border Figure I. B.1).I. a 1989-1997 cross-border M&As in 1997 (annex table B. because of its importance for other industries and the large market for its services.23 It is interesting to note. deregulation has led to inter-firm agreements -. production became more knowledge-intensive across a wider range of industries. that a Includes only M&As in which the foreign investor acquires more since full or majority ownership by foreign than a half of the voting securties. In some industries such as transport. The production and distribution of electricity -. 14). it is expected that all leading telecommunication firms will be privatized in Latin America by the year Source : UNCTAD.

this decline may reflect a tradeoff between M&As and inter-firm technology agreements. Based on the "Fortune 500" listing for 1995 ( For tune . Inter -firm tec hnology a greements. A rank-order correlation of the assets abroad (UNCTAD. 29 April 1996). Majority foreign-owned M&As only. In particular.Tr World Investment Report 1998: Trends and Determinants competitive conditions. but steeply declining to just over 20 per cent in 1995 and 1996. but their share of the total number of such agreements has varied considerably over Figure I. They emerge in the choices firms make between the acquisition of assets and the use of arm’s-length inter-firm technology agreements. two types of inter-firm agreements can be distinguished (UNCTAD. for example.10). 24 . Driven by these underlying processes. Differences in strategy also emerge from an analysis of the type of agreements that have been signed over time. liberalization has contributed to the integration of markets and to the diffusion of a process of innovation-based competition. a 1980-1996 (Percentage) 1980s. Source : a MERIT/UNCTAD database. and M&As. 29-31) and the number of inter-firm technology agreements of the top 100 TNCs (ranked by foreign assets) in 1995 provides evidence for this. 1997a. As M&As rose sharply in 1996 and 1997 (figure I. Developed countries Behind the aggregate figures.18). lie major differences in the strategies that firms adopt in their relationships with other companies.25 The Spearman’s rank-order correlation coefficient of .26 Nor does large size alone predict a continuously high involvement in arm’s-length technology agreements. firms have sought to increase their flexibility and leverage their R&D investments through inter-firm agreements.002 level in a onetailed test show a very weak relationship between these two variables.3072 and its significance at the . Inter-firm technology agreements. as well as among different types of inter-firm agreements. it hovered around 30 per cent. pp. p.18. 1997a. a 1985-1996 Source : a MERIT/UNCTAD database. 1. in total inter -firm tec hnology a greements.17. The share of the w orld's lar g est 100 firms world's larg time (figure I. Large firms have certainly been active players in inter-firm technology agreements. are not necessarily those that are most involved in inter-firm technology agreements. particularly among members of the Triad. Figure I. Over the same period.17). Throughout much of the inter-firm technology agreements. rising to over 40 per cent in 1991. The need to amortize the higher costs of R&D across a wider geographical space and the opening of new markets to competition have accelerated the pace of M&As within the overall process of both foreign and domestic investment. the trends in inter-firm technology agreements have thus largely parallelled those in M&As (figure I. More internationalized firms. however.

agreements have declined since then. The automobile industry is illustrative.1980-1996 in which the flow of technology is from (Number) licensor to licensee or from one joint-venture partner to the other. remained parallel. Sector-specific patterns of competition and industry structure have also been important in shaping the partnering strategies of firms over time. Data covering the period 1980-1996 show that information technology remains the top industry in which technology agreements are being signed. Number of inter-firm tec hnology industry.19).20. In the food industry. particularly. Strategies of vertical disintegration and the use of new forms of supplier-client Source : MERIT/UNCTAD database. Industries that are highly knowledge-intensive have the largest number of inter-firm agreements. the average annual number of one-way agreements being signed in 1992-1995 fell to 158. although R&D. the number of agreements peaked in the mid-1980s. 1980-1996 began in the early 1990s and has continued through 1996. there is a rising trend that industry by a greements. The preference for one-way agreements shifted to two-way partnerships towards the middle of the decade. their share in total agreements doubled from 14 per cent during 1980-1983 to 28 per cent in 1996. show a similar rising trend. design. These diverging trends have continued in 1996 when only 109 one-way agreements were signed as compared with 541 two-way partnerships. In both cases.20). the slope of the two curves radically changed: whereas.19. an average number of 223 one-way and 279 two-way agreements were being signed each year. b y selected industr y. In the automobile inter-firm technology Figure I. During the 1980s.20). The e volution in the type of inter-firm 14): those that involve a one-way relationship technology agreements. 25 . however. Some 254 technology agreements were signed in that industry in 1996. and two-way relationships involving joint research and/ or development agreements and the creation of joint R&D ventures with specific research programmes. Their number has also increased dramatically over time. the strategic choices of firms with regard to inter-firm technology agreements are shaped by industry-specific characteristics. Far less knowledge-intensive are the automotive and food industries. engineering and marketing are increasingly important inputs in new product development in each of these industries (figure I. from an annual average of 74 during the period 1980-1983 to 248 during 1992-1995.1980-1996 tec hnology a greements. To a large extent. Beginning in 1990. while the number of two-way partnerships rose to 468. bio-pharmaceuticals. it alone accounted for 37 per cent of all agreements (figure I.Chapter I ev inter-firm Figure I. during the 1988-1991 period. Pharmaceuticals and. The entry of newcomers from Japan during the 1960s and 1970s brought with it a fundamental restructuring of the global industry. but the trend lines Source : MERIT/UNCTAD database. both oneway agreements and two-way partnerships followed similar rising trends (figure I.

14).2 per cent over the period 19851995 (Mytelka and Delapierre.27 With the acquisition of Rolls Royce by Volkswagen in 1998 (see figure I. A look at the portfolio of inter-firm technology agreements held by Ford (figure I.21) and Toyota (figure I. Joint development agreements with suppliers of manufacturing technology also became important as factory automation advanced. but in its relationships with parts suppliers Toyota works mainly with Japanese firms. thus strengthening their market power in the future (Mytelka and Delapierre. Figures for supplies of parts by vertically integrated units for other companies were as follows: 43 per cent for Volkswagen. for firms from developing countries. Research into the use of ceramic materials and the development of fuel cells. For firms in developed countries. The top four firms have been virtually identical since the mid1980s.9 to 44. By the mid-1980s. navigational systems and other technologies have led to a variety of partnerships with suppliers of parts and components as well as with other automobile manufacturers. More recently they have also developed a large number of technology partnerships with rival automobile manufacturers. but the four-firm ratio increased from 40. however. 37 per cent for GM. they can also become a means of controlling the direction of technological change. As to concentration ratios. Ford. Japanese technology partnerships with automobile manufacturers are far fewer and focused less on the development of a new generation of automobiles than on parts and components for such a vehicle. as the major automobile manufacturers sought to develop a new generation of cars to meet more stringent environmental and performance standards.6 per cent and the ten-firm ratio from 63.9 to 71. Over time. Both companies draw on an international group of manufacturing technology firms as partners. 26 . In contrast. partnerships have begun to increase in the 1990s. and setting standards early in the process of new product development -thus ensuring more rapid market penetration. which had been based largely upon the mass production of standardized products and vertical integration.Tr World Investment Report 1998: Trends and Determinants relationships represented a significant break with existing organizational technology in United States and European automobile firms. with Nissan and Volkswagen changing places in 1991. expanding access to a range of possible technologies from other industries. Nissan and Toyota (Kurylko. a set of preferred first-tier parts suppliers emerged with whom new forms of partnerships for the design of principal components and subsystems were entered into by companies. As discussed below. GM’s share of the world market declined slightly. many of which are geared to developing the car of the future. inter-firm technology agreements remain a critical means of maintaining flexibility. 30 per cent for Fiat and 25 per cent for Honda. Renault and Peugeot. Despite the role that M&As have played. only Ford and Volvo manufactured more than 60 per cent of their parts in-house. inter-firm technology agreements provide a different array of benefits. 1996). the global automobile industry gave every sign of great stability and growing concentration. no major luxury-car manufacturer remains independent. as every assembler sought to cover the full range of vehicles. 1997). 1997). As agreements with rivals illustrate. whereas Ford engages in partnerships with a worldwide network of parts suppliers. 38 per cent for Mercedes-Benz. By 1996. 33 per cent for BMW.22) provides evidence of the differing ways in which companies have met these new competitive challenges. is much more focused on the United States market in its partnerships with upstream suppliers of inputs for parts and components.

1991 a . 1989 Nissan (Japan) 1989 Motor Iberica (Spain) 1994 Daimler-Benz (Germany) 1995 Audi NSU (Germany) 1995 BMW (Germany) 1996 Mazda Motor Co.270 agreements concluded during the 1980s to 6. (United States) Matsushita Elec.24). Their share has also increased from 4. were partners in only 11 per cent of the agreements and firms from other developed countries accounted for barely 4 per cent of the total. 1995 Chrysler (United States) 1986 Iveco (Italy) 1987.984 agreements recorded in the 1990s (figure I. Sixty per cent of the 191 agreements signed in this period between firms based in the United States and those based in developing countries were concluded in the 1990s. firms from other developed countries were far less involved in technology partnerships with the developing world. (United States) Guest Keen & Nettlefolds (United Kingdom) Grob Werke Gmbh (Germany) ABB Robotics (Sweden) Advanced Assembly Automation (United States) AT&T (United States) Suppliers for Supplier s of inputs f or components 1983 1986 1986 1988 1989. 1994 Garrett Corp. (United States) Phoenix Steel Corp. Japanese firms. The por tf olio of tec hnology a greements of For d. United States firms have been the major partners of developing country firms. from an average of 10 agreements per year in the early 1980s to nearly 40 per year in the mid-1990s. Over the period 1980-1996. 1996 a General Motors (United States) 1993. 1983-1996 Man ufacturing tec hnology pro vider s Manufacturing technology providers 1984 1985 1985 1985 1985 1986 1988 1989 1989 1989 1989 1990 American Robot Corp. portf tfolio technology agreements Ford. Figure I. (United States) Ceradyne Inc.23). Silicones (United States) Hewlett-Packard (United States) Siemens (Germany) Directed Technologies (United States) Cambridge Industries (United States) Lear Sitting Holding (Italy) manufacturer ufacturers Auto man ufacturer s 1988. 27 . Industrial (Japan) Ge. for example. While firms from the European Union were also major technology partners for developing country firms and accounted for over one-third of the total.9 per cent of the 4.Chapter I 2. (Japan) Source : MERIT/UNCTAD database. their number is on the rise. (Japan) JBL Inc. accounting for over two-fifths of agreements involving the latter (figure I.2 per cent of the 3. a Signed 2 technology agreements that year. 1993 a . (United States) Bendix Industry Group (United States) Boeing Computer Services (United States) Measurex (United States) Teknowledge (United States) Iscar Ceramics (Israel) Inference Corp. (United States) Occidental Petroleum (United States) 1992 General Electric (United States) Engelhard Kali-Chemie (Germany) FORD suppliers Equipment supplier s 1984 1985 1987 1990 1991 1994 1994 1995 1996 Yamaha Motor Co. Developing countries Although inter-firm technology agreements involving firms from developing countries account for only 455 agreements in the MERIT/UNCTAD database. 1994(2).21.

inter -firm tec hnology a greements. tec hnology a greements.24.24). manufacturer ufacturers Auto man ufacturer s 1982 1993 1996 1996 General Motors (United States) Volkswagen (Germany) Hion Motors (Japan) Nissan (Japan) Source : Developing country firms are also beginning to partner more often with each other. and their number is rising. 28 . Industrial (Japan) Nippondenso (Japan) MERIT/UNCTAD database. 1982-1996 Suppliers for Supplier s of inputs f or components 1986 1987 1987 1988. information technology ranks at the top. Developing country partner tners Figure I.22. Such agreements accounted for nearly 7 per cent of the 455 technology agreements involving a developing country firm. Nearly half of the 31 agreements involving developing country firms in partnership with one another were signed in the past four years (figure 1. accounting for 27 per cent of the agreements involving a firm from the developing world. From an annual average of four per year during the 1980s. but it suggests that developing country firms are becoming viable partners in joint R&D activities.Tr World Investment Report 1998: Trends and Determinants portf tfolio technology agreements Figure I. 1995 Ube Industries (Japan) STK Ceramics Laboratory (Japan) NTT (Japan) 1990 Motorola (United States) Aichi Steels Works (Japan) Manufacturing technology providers Man ufacturing tec hnology pro vider s 1984 1986 1986 1991 1994 Renault Automation (France) Nippon Automation (Japan) Shoun Machine Tool (Japan) IBM (United States) ATR (Japan) TOYOTA suppliers Equipment supplier s 1987 1989 1991 1993 1996 1996 Teleway Japan (Japan) Tokyo Electric Power (Japan) Toshiba (Japan) Showa Denko (Japan) Matsushita Elec. 1980-1996 (Number) Source : MERIT/UNCTAD database.25). As in the case of developed country firms. De veloping countries: n umber of inter -firm Developing number inter-firm technology agreements. it reached 13 in Figure I. 1980-1996 (Number) Source : MERIT/UNCTAD database.23. The por tf olio of tec hnology a greements of To y ota. and the number of such agreements is rising. De veloping countr y firms and their par tner s in inter-firm technology agreements. The industry profile of partnering activity by developing country firms is significantly different from that of firms in the developed world (figure I.

29 . Based on 455 agreements. They also enable developing country firms to leverage their own R&D resources and to build the kind of credibility that attracts other partners and new customers at home and abroad. the new two-way partnerships are a bridge to knowledge bases abroad.Chapter I the 1990s. by developing country Figure I. By providing windows on the world.25. This is most pronounced in knowledge-intensive industries such as information technology. which links Northern Telecom (Nortel) to four Indian software companies. A second indicator of the extent to which firms in developing countries are becoming viable technology partners is the growing importance of two-way partnerships. Industr y pr ofile of par tnering activity in inter -firm tec hnology a greements. But a number of information technology firms from other Asian countries are also forming partnerships. In the 1980s. with Samsung at the top of the list.254 agreements. especially with firms from the developed world (box I. b y de veloping countr y firms and all firms. For developing country firms. In the 1990s. the share of two-way agreements had risen to 55 per cent. but have slowly transformed themselves into two-way partnerships. accounting for 78 per cent of the information technology agreements involving a developing country. Pharmaceuticals constitute the second most important industry for partnering activity by firms from developed countries. with 21 alone being signed in 1996. The Nortel Network. technology agreements in the chemical and automotive industries are far more important and account for 19 per cent and 9 per cent of the total. Industry profile partnering inter-firm technology agreements. is a case in point (box I. respectively. but account for less than 6 per cent of the agreements involving a developing country firm. they serve as a way of keeping up with a rapidly moving frontier.3). Based on 8. 1980-1996 (Percentage) Source : a b MERIT/UNCTAD database. Many technology agreements in industries such as information technology began as one-way arrangements. For developing country firms. one-way agreements were the norm. Korean firms are the most active here.3).

arm’slength technical contracts and involved low-skill assignments (such as programme testing and computer-aided design) and very limited interaction between Nortel’s development teams and the Indian firms. founded in 1981. and through the use of new telecommunications-related software. the International R&D Group of Nortel entered into global software outsourcing arrangements with two Indian software development companies. The Nortel network Nortel is a leading telecommunications firm from Canada which specializes in developing technology for digital networks. Infosys. Initially projects on which Nortel’s Indian partners worked were based on hierarchical. finance. This firm employs 9. Software is increasingly substituting for a variety of tasks that were previously performed by telecom hardware. Infosys Technologies (Infosys) and Wipro Systems (Wipro). telecommunications. it has moved to establish R&D activities abroad. Gradually. 1998). it has 38 R&D collaboration sites in different parts of the world and has developed strong non-equity R&D-based relationships with four of the leading software firms in India (Basant.5 billion. 30 . Currently. Learning opportunities arose especially through exchanges of experts between Nortel’s research facilities in Canada and partner sites in India.3 million. The allocation of projects to each partner by Nortel is governed by Nortel’s overall strategy to map disciplines across partners and avoid overlap.. Each partner in India has specializations and. of which 5 per cent was spent on R&D.800 people and had a turnover of $201 million in 1996-1997.500 employees and a turnover of $14. Chandra and Mytelka. In 1989. Wipro Systems. software development has become very expensive. These firms are well-established companies and compete with each other in domestic and international markets: * TCS was set up over 30 years ago and is Asia’s largest consulting group with activities that range from management consulting to information-technology solutions. Nortel began to commission larger and more complex development projects requiring more sophisticated hardware and communication infrastructure along with enhanced interaction between Nortel and Indian teams. Nortel remains the director of the network. insurance. /. * * * The Nortel network is not equity-based. it develops tools and services for the design of semiconductors. Internet and engineering and bank automation. (Nortel alone annually absorbs more than a quarter of Canada’s total output of software engineers and programmers.8 million. Its revenues in 1997 were $15. retailing. which works on a broad spectrum of telecom products. Silicon Automation Systems (SAS) in Bangalore and Tata Consultancy Services (TCS) with headquarters in Mumbai. Its turnover in 1996-1997 was $37. due in part to the shortage of skilled manpower. SAS is the smallest of the four firms. Since the firms do not work together. of which about 8 per cent was invested in R&D. the four Indian partners duplicate Nortel’s lab in Ottawa. a division of Wipro Infotech. telecommunications.. Its annual turnover in 1996-1997 was $4. In 1993-1994 it had over 2.) As a result. although Nortel has invested in training and in the installation of state-of-the-art telecom hardware. is a software development company with a focus on software services in the areas of distribution. Established in 1989.6 million. was set up in 1984 as a unit focusing on global software outsourcing. collectively. were added to this arrangement in 1992. For firms in North America. The firm employs 300 people.Tr World Investment Report 1998: Trends and Determinants Box I. computing and networking equipment.3. offshore development and branded software products. The relationship evolved as the Indian partners gained experience with the successful completion of many of these projects. 37 per cent of which emanated from outside North America. both of which are located in Bangalore. Both Nortel and its partners hope that the relationship will evolve into a full two-way partnership. such as digital switches and large-capacity (2 gigabytes) dedicated lines for communication between Nortel and its Indian partners. of whom 250 are engineers. The contractual relationship between Nortel and each of its partners is structured individually.

see Gray and Rugman. $37 million in textiles and $24 million in agriculture (United States. Japan and the United States) or a combination of one or more of the countries depending on the variable and extrapolating them on the basis of the relative share of these countries in the worldwide FDI stock. trade credit and debt securities due to direct investors. If these omitted affiliates are included the average size of (non-bank) foreign affiliates was $83 million. 1998). concluded) With one of these firms. In addition. FDI stock measures the value of share capital and reserves attributable to direct investors. that all TNCs. compared to $111 million for surveyed (non-bank) foreign affiliates in 1994 (United States. Notes 1 2 3 4 These estimates are obtained by using data on these variables available for the foreign affiliates of a limited number of countries (France. One of the problems is that data on sales (as well as other operational variables) are considerably inflated by the inclusion of sales by wholesale affiliates 31 . Germany. 1996). It should be noted that the average size of foreign affiliates is different from industry to industry. For the world’s largest 100 TNCs (see chapter II). the Indian partners have rapidly gained experience and knowledge in the design of telecommunications software. 1994. Nortel’s interest in India also grew from its search for opportunities to adapt its technology for the Asia-Pacific market. and second. and Bellak and Cantwell. Average asset size also differs in keeping with the size of the parent company. The OECD recommends that the FDI stock be measured in market value rather than in book value from the balance sheets of investors reported on a historical cost basis (OECD. 1996). Although there are a number of problems in this methodology. In the case of foreign affiliates of United States TNCs. regardless of nationality. the market for which is expected to grow dramatically in India in the immediate future. It also includes retained dividends and loans. with specific emphasis on multimedia technologies. the average size of foreign affiliate assets amounts to $180 billion. 1997a). the World Investment Report continues to use it in the absence of a better alternative. Italy. Initially contracted for computer-aided design services. This has enabled it to develop solutions for digital communications. that the effects of FDI are uniform in all regions as no host-country differences are considered. SAS has redefined its core competence as digital signal processing. AT&T and Ericsson -.Siemens. It should be noted that the United States survey data exclude foreign affiliates whose assets. Department of Commerce. 1998). Its principal international competitors -.Chapter I (Box I. Department of Commerce.are already present in India. The figures are based on firms in all industries. sales and exports everywhere in the world. Its use implies the following assumptions: first. Alcatel. sales or net income are less than $3 million. 1996). implying that one unit of FDI produces the same size of value added. while United States small and medium-sized TNCs own $34 million in assets per foreign affiliate (Fujita. $93 million in chemicals. though there are several evaluation methods for deriving the values. credibility in the telecommunications area has been enhanced for Nortel’s Indian partners and with it their ability to attract new customers. Nortel’s alliance with the four Indian firms thus provides Nortel with access to the inexpensive software development resources of India at the same time as it allows it to enter the Indian market with products specially designed for India. Through their relationship with Nortel. the shift from a one-way to a two-way partnership is well advanced. Data from Japan’s Ministry of International Trade and Industry on Japanese TNCs and their foreign affiliates suffer from a range of problems (Ramstetter. the average size of assets was $298 million in motor vehicles. broadly behave in a similar manner no matter where their foreign production takes place.3. Re-evaluation of FDI stock by various methods results in different stock figures that may lead to different and sometimes misleading interpretations of FDI situations (for example. SAS has thus moved to the development and design of prototypes of their own to meet future development needs at Nortel.

Information on FDI in 1998 is still limited. Small decreases in FDI outflows are expected to be recorded in the Republic of Korea and Japan. 1992a). BEA News Release. The real GDP growth rate of the world economy is expected to fall from 3.1 per cent in 1998. Department of Commerce. Malaysia and the Republic of Korea in 1998.) The stabilization of exchange rates in this area is one of the reasons Japanese firms are increasing their FDI in the European Union (Japan. 1998).gov/bea/newsrel/ fdi97. p. Bureau of Economic Analysis. businesses continued at high level in 1997". 1997a). Inflows into the United States. the relative level of income generated in each region. 18). The decline in FDI outflows in 1996 (which had not been reported in World Investment Report 1997 (UNCTAD. while a small decrease is also expected in the United States and Latin America (UNCTAD. Bureau of Economic Analysis (www. and different methods of data collection and reporting between home and host countries. A significant decline is forecast for Asia.) See “definitions and sources” in annex B of this Report. 1998a). Export-Import Bank.Tr World Investment Report 1998: Trends and Determinants 5 6 7 8 9 10 11 12 13 14 15 16 whose data may be double-counted. Due to the fact that a number of developed home countries (which account for the bulk of FDI outflows) have better FDI data collection systems. 30 June 1998. Department of Commerce.S. while inflows are expected to decline in Indonesia. foreign affiliates also import. 1998a). Financial Times. the average value of sales was $84 million (Japan.doc. based on FDI reported for certain months of 1998. due to at least one large acquisition -. The relative importance of FDI in terms of gross fixed capital formation may also reflect. The World Bank includes.of Chrysler by Daimler-Benz worth $38 billion -. including Japan. 1998a. Financial Times Survey.htm). In terms of contribution to GDP and the balance of payments. between affiliated enterprises could be influenced by profit and tax considerations. 32 . they do not. These numbers do not include the countries that have negative inflows and for which the data on gross fixed capital formation are not available. Ministry of International Trade and Industry. was caused mainly by the revision of the United States outflows data to exclude (non-permanent) FDI in financial intermediaries in the Netherlands Antilles and other economies. There are several reasons for this discrepancy. “US mergers and takeovers set record in first 6 months”.despite the fact that inflows in the first quarter of 1998 declined by 12 per cent over the previous period on a seasonally adjusted basis and by 3 per cent over the same period in 1997. United States outflows in the first quarter of 1998 decreased by 13 per cent over the previous period (seasonally adjusted) and declined by 4 per cent over the same period in the previous year. Sales through wholesalers of goods produced by other affiliates are likely to be included in sales of wholesale affiliates.) Cross-border M&As by United States firms in the first half of 1998 reached half the size of the total in 1997 (William Lewis. outflows of FDI may reflect worldwide trends more accurately (United Nations. by a margin of $10 billion in 1995 (Japan.bea. Of course. 10 June 1998. 1997a). Payments for royalties. it is not always possible to distinguish between FDI-related payments and payments for technological services. Department of Economic and Social Development. Direct investors take profitability into account when making the locational decisions that influence the pattern of FDI inflows. in the group of developing countries. 30 April 1998. rather than total exports should be considered. “Foreign investors’ spending to acquire or establish U. the countries in transition of Central and Eastern Europe. including different treatment of reinvested earnings by home and host countries. In principle. patents etc. in addition. are most likely to rise. the import propensity of foreign affiliates is relatively high. the largest host country in the world. (Data are provided by the United States. The reduction of transaction costs inside the single currency area and greater price transparency may facilitate and accelerate capital flows and cross-border M&As. Data are available only for Japanese foreign affiliates: they imported more than they exported in manufacturing. Department of Commerce. If only manufacturing affiliates are considered. net exports (exports less imports). According to the data on foreign affiliates of United States TNCs. in reality.2 per cent in 1997 to 2. licence fees. tables 2-21-13 and 2-22-13). Ministry of International Trade and Industry. (For further details. see “definitions and sources” in annex B of this Report. inflows and outflows of FDI should balance but. affiliates in all developing regions (including West Asia) show a higher income-sales ratio than do those in developed regions (United States. from the Web site of United States. therefore. In fact. (See “Birth of the Euro”.

growth of outflows excluding this component was only 10 per cent. The absolute value of the correlation coefficient shows the strength of the relationship between foreign assets and inter-firm technology agreements. those that involve the long-term position of firms or products.14): Volkswagen acquired Audi and Porsche and Ford took over Aston Martin and Jaguar. the number will be 14 in 1998. Glaxo Wellcome (United Kingdom). Financial Times Survey. 1998a. The coefficient range is from -1 to +1. IV. “Global business outlook”. Information provided by Gendai Advanced Studies Research Organization (Tokyo). PSA and Renault (France).Chapter I 17 18 19 20 21 22 23 24 25 26 27 As of mid-1998. cit. Roche (Switzerland) and American Home Products (United States). Derived from the MERIT/UNCTAD database. It was developed at the Maastricht Economic Research Institute on Innovation and Technology (MERIT) of the University of Maastricht and modified by UNCTAD. and Daewoo and Hyundai (Republic of Korea). but this was mainly caused by the inclusion. for the first time. Mass market assemblers bought up-market companies (figure I. that is. Japanese firms too prefer greenfield projects or minority M&As: only 12 per cent of Japanese affiliates abroad had been established through M&As as of 1995 (Japan. They are Merck (United States). table 2-27-13). 16 March 1998. At the same time. BMW. Currently. Novartis (Switzerland). Ministry of International Trade and Industry. Financial Times Survey. Volvo (Sweden). “Global business outlook”. 13 January 1998. and the sign of the coefficient indicates the direction of this relationship. Nissan and Toyota (Japan). Pfizer (United States). Judging by outflow data for Belgium. Bristol Myers Squibb (United States). Honda. Ford and General Motors (United States). The analysis excludes 15 cases for which no alliances were found in the MERIT/UNCTAD database. from 30 per cent to 49 per cent (based on UNCTAD FDI/TNC database). and Daimler-Benz merged with Chrysler and also established a joint venture with Swatch. op. Germany. luxury car manufacturers spread their own range towards lower-end vehicles of the market: BMW bought Rover. In particular. the share of FDI going to the European Union increased from 48 per cent in 1996 to 50 per cent in 1997. Fiat (Italy). The year 1996 showed an increase of nearly 20 per cent in FDI. only some European Union member states had reported outward FDI data for 1997 by destination. the major 15 are: Chrysler. Portugal and the United Kingdom for 1997. Belgium and Portugal showed significant increases in the share of intraEuropean-Union FDI: for the former. “Pharmaceuticals”. With the expected merger between Chrysler and DaimlerBenz. 33 . Daimler-Benz and Volkswagen (Germany). Spearman’s rank-order coefficient is a nonparametric version of the Pearson correlation coefficient based on a rank ordering of the data rather than on actual values. p. The MERIT/UNCTAD database includes only strategic inter-firm technology agreements. Denmark. Italy. the share of FDI outflows to the European Union rose from 41 per cent in 1996 to 84 per cent in 1997 and for the latter. of reinvested earnings.

Tr World Investment Report 1998: Trends and Determinants 34 .

The only major change was Nestlé (Switzerland) moving from ninth to eleventh place. Highlights In 1996. (Venezuela) and Daewoo Corporation (Republic of Korea).Chapter II CHAPTER II TRANSNATIONAL THE LARGEST TRANSNATIONAL CORPORATIONS CORPORATIONS world’s A. pushing Royal Dutch Shell (United Kingdom/Netherlands) into second place (table II. in 1996. In 1995. The rankings otherwise remained fairly stable among the top ten in the list. and Kvaerner (Norway). (United Kingdom). the top position in the list of the world’s 100 largest non-financial TNCs ranked by foreign assets changed for the first time in six years when General Electric Company (United States) moved from third into first position.A. though no other developing country firm has yet joined them. which took over Carnauld Metalbox (France). The world’s 100 largest TNCs 1. Most of the 1996 entrants already occupied a position in the vicinity of the top 100 in 1995. which was formed through the merger of Sandoz and Ciba-Geigy. Movement at the bottom of the list is also limited. which acquired Trafalgar Plc.2) and ten exits (table II.3). the list of the top 100 TNCs had included for the first time two TNCs from developing countries -Petróleos de Venezuela S. being replaced by Mobil Corporation (United States).1). special situations arise when M&As involve firms with large foreign assets. Crown Cork & Seal Company (United States). The 1996 list of the top 100 TNCs includes ten new entrants (table II. these companies strengthened their respective positions by moving up from 88 to 73 and from 52 to 43. 3 5 . and most of the firms no longer included in the list are now ranked between positions 100 and 120. as in the case of Novartis (Switzerland). However.

9 12.1 81.0 38.8 79.1 .5 .World Investment Report 1998: Trends and Determinants 36 able world’ orld’s by foreign Table II. Pharmaceuticals/chemicals Petroleum expl..2 Industry Industr y b Foreign Total Foreign Transnationality assets index indexa Corporation 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 83 32 75 22 85 52 79 49 71 38 3 2 47 14 34 57 74 8 70 11 9 56 36 40 19 20 35 62 81 69 31 68 30 1 42 46 43 77 82 General Electric Shell.8 53.9 .2 17. Automotive Computers Automotive Automotive Diversified Petroleum expl.7 30.7 66.3 34.8 44. e 43381 149217 34000 41818 .2 43.8 18.8 30...0 26.4 97.4 45.4 32./dist.4 23.0 89.. e .0 158.0 55./dist.4 124.4 20.8 54.8 51.8 45.3 35.8 28.. Industries Plc Du Pont (E.1 61./dist.5 38.9 87.9 62.2 30..1 71.8 69.3 96. Royal Dutch c Ford Motor Company Exxon Corporation General Motors IBM Toyota Volkswagen Group Mitsubishi Corporation Mobil Corporation Nestlé SA Asea Brown Boveri (ABB) Elf Aquitaine SA Bayer AG Hoechst AG Nissan Motor Co.8 33.2 19.0 46.8 25.5 222. Total Foreign Total index inde x a (Per (Per cent) Employment Employment Country Countr y United States United Kingdom/Netherlands United States United States United States United States Japan Germany Japan United States Switzerland Switzerland/Sweden France Germany Germany Japan Italy Netherlands/United Kingdom Germany Netherlands Switzerland Germany France Japan France Switzerland United Kingdom United States Italy France United Kingdom United States France Canada Germany Japan Germany Japan Japan Electronics Petroleum expl.9 26. e 42339 . d 29.7 34.2 33.4 62.0 75. e 90390 273000 67208 216000 39074 176000 118820 95000 .4 /.2 47.4 80.4 62.6 51.5 24.4 38.0 65.6 28..0 50.3 41.3 64.3 43. d 17.7 67. d .6 79./ref.8 . Food/tobacco Petroleum expl.. d 21..6 59. e 51900 .4 42.4 38.6 40.5 32.2 19. BMW AG Mitsui & Co. d 272. e 1997 239000 101000 371702 79000 647000 240615 150736 260811 8794 43000 212687 214894 85400 142200 147862 135331 237865 304000 290029 262500 48972 379000 190600 163000 57555 116178 53700 154000 83424 140905 163854 97000 75250 31000 103406 101100 116112 11250 6684 30.6 38.7 41.2 23.4 31.4 42.4 .8 33.7 72.A..6 .3 36.8 26.0 44./ref. ranked by foreign assets.6 39.5 43.4 127.7 20.1 113..0 27.0 50... Ltd.9 60.6 31.8 102.6 25./ref.2 63.3 54.8 13.7 29. Food Electrical equipment Petroleum expl..3 52.6 45.4 24.1.1 28./dist.0 29./ref.3 59.3 95.0 95.2 69.5 24.9 109.2 56.5 56..3 30.1 41.2 53.8 16.2 63.9 17.. d 18. Automotive Food/tobacco Chemicals Chemicals/pharmaceuticals Beverages Chemicals Automotive Automotive Diversified Trading 82. Ltd.4 30.9 26.1 35.1 70..1 258.8 77.4 .2 39.1 84000 79000 . The world’s top 100 TNCs.1 18.9 18.3 147.V..0 35.0 30. FIAT Spa Unilever f Daimler-Benz AG Philips Electronics N.3 48. 1996 (Billions of dollars and number of employees) Assets Transnationality by Ranking by Sales Foreign 21.2 128.7 31.5 29.) Rhone-Poulenc SA Seagram Company BASF AG Honda Motor Co.I. Automotive Petroleum expl./dist.4 60.5 58.6 32./dist./dist.1 79.5 42.9 46.8 132.3 12.4 25. d 31.1 42.0 50.8 12.6 50.7 13./ref.9 65.9 59. e 91192 37750 94659 .6 37.9 84.0 117.2 70.8 31.6 31. d 19.6 28.2 ..2 87./ref.5 56.0 32. Ltd.2 43.6 32.4 29.5 75.1 56.8 47. e 221313 121655 34837 123042 3819 22900 206125 203541 41600 94375 93708 .4 41. Nissho Iwai Corporation .8 82..T.3 29.8 75.0 27.1 55./ref. d 24.9 47.4 39.6 55.5 23.. Chemicals Chemicals Automotive Automotive Food Automotive Electronics Pharmaceuticals Electronics Electronics Electronics Petroleum expl.4 34..0 18. Roche Holding AG Siemens AG Alcatel Alsthom Cie Sony Corporation Total SA Novartis British Petroleum (BP) Philip Morris ENI Group Renault SA B.1 65.8 20.9 12.4 33.2 67.

8 20.4 30.3 54. ranked by foreign assets.5 70.5 58.. e 29613 47200 11323 ./ref.8 10.1 .0 9.4 88.3 16.9 12.5 11.5 14.0 5.9 76.9 11.5 13.9 61.0 45.9 28..3 21.7 67.9 24.6 84.6 28.0 68.3 32.5 28. e 50053 39122 46000 74467 20400 56400 2873 98220 .2 27.9 70.8 72.2 35.4 11.3 12./ref.9 14.7 31.7 6.4 11. d 66.9 15.7 10.5 14.1 45./electronics Chemicals/cosmetics Paper Petroleum expl.0 20.6 8.4 18.0 14.2 34.0 17.4 16.5 11. Republic of Australia United States United States Germany Japan United Kingdom Canada United States France Japan United States Sweden Switzerland Canada France Australia Japan Japan Sweden United States United States United States United States Sweden United States United Kingdom United Kingdom United Kingdom United States Venezuela Japan United Kingdom United States France Japan Trading Electronics Chemicals/agribusiness Diversified Media Petroleum expl.1 78...7 23. e .5 38. d 13.5 55.5 12..7 62. The world’s top 100 TNCs..6 8..2 21. Inc.4 11.able world’ orld’s by foreign (continued) Table II.3 10.4 16.. e 47600 12756 53000 35000 63738 57433 ..7 21. Sumitomo Corporation Electrolux AB AT&T Corp.1.8 26.4 .2 9.7 15. d 9. e . d 11.4 10.6 27.7 .8 15.1 36.6 .6 33.3 Industry Industr y b Foreign Total Foreign Transnationality assets index indexa Corporation 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 93 58 28 51 27 78 48 37 86 15 4 66 10 88 61 23 6 64 39 76 97 87 7 98 67 80 91 45 44 18 16 26 59 65 89 25 63 92 96 Itochu Corporation Hewlett-Packard Ferruzzi/Montedison Daewoo Corporation News Corporation Chevron Corporation Dow Chemical Robert Bosch GmbH Marubeni Corporation Cable And Wireless Plc Thomson Corporation Texaco Incorporated Michelin Matsushita Electric Xerox Corporation Ericsson LM Holderbank Financiere BCE Inc.6 14.0 13..7 11. Fujitsu Limited Hanson Plc Motorola./ref.7 108.3 19.8 8..3 68.1 23.4 10.7 . Rubber & plastics Electronics Photo equipment Electronics Construction materials Telecommunication Industrial material Metal Electronics Trading/machinery Electrical appliances Telecomm.6 19.8 12.4 15.9 7.3 60. Générale des Eaux Nippon Steel Chapter II 3 7 .1 26. Saint-Gobain SA Broken Hill (BHP) Hitachi.9 36.7 14.3 55.5 24.. e 9766 122000 29564 47609 26513 40820 40300 172359 9282 37448 50500 28957 119780 270651 86700 93949 42970 121000 111701 60100 330100 9129 112140 130400 106000 87000 41723 71905 237000 65699 53460 115805 89300 59318 167000 56000 139000 217300 24527 25.4 21.6 32./dist. e 31000 9290 26435 153000 55000 40209 .0 7. Automotive Restaurants Food/beverages Pharmaceuticals Plastics and foam Chemicals/pharmaceuticals Diversified/trading Electronics Building material Electronics Diversified/utility Metal 15.2 8.8 17.2 50.4 43.8 153.4 17.9 42.7 21.3 10. d 14.3 25. Total Foreign Total index inde x a (Per (Per cent) Employment Employment Country Countr y Japan United States Italy Korea.5 28.5 6.9 28.9 10.4 9.1 43.0 20.8 18.8 46.2 25. 1996 (continued) (Billions of dollars and number of employees) Assets Transnationality by Ranking by Sales Foreign 40.7 8.5 44. d 10.1 13.4 14.8 16.0 14. Chemicals Automotive Trading Telecommunication Printing and publishing Petroleum expl.2 15.1 21.3 71.6 35.9 10.6 13.4 24. Procter & Gamble International Paper AMOCO Corporation Volvo AB McDonald’s Corporation Grand Metropolitan Glaxo Wellcome Plc BTR Plc Johnson & Johnson Petróleos de Venezuela S.7 7.8 17.9 36.4 9.5 .9 49.2 14.1 14.1 12.5 26.1 20.9 24.4 9.2 8. e .7 10.0 8./dist.7 12.1 80.2 .1 27.6 37.1 20.0 12.8 29.0 28.2 11.4 38.8 20. Ltd.3 10.2 5.7 34..A.7 30.4 52.9 8..4 /.6 62.7 44.7 43.6 15.5 58.5 89./dist..0 10.6 47.9 44.7 2584 48200 17570 37501 17212 12095 21039 .4 6. d 12.3 47.7 18.9 8.3 23.9 13.1 94.2 77.2 8.. e .5 17.0 32..7 113..1 20.

ranked by foreign assets.0 9.1 10.7 56. Foreign assets. sales and employment are outside the United Kingdom and the Netherlands. e 70700 126000 75628 30000 35400 74700 67584 13588 92458 486000 81579 44611 186000 80199 22800 51492 119703 31700 102000 59746 19340 22862 73. Chrysler Corporation Canon Electronics Inc.2 28.1 18.8 53.7 23. Danone Groupe SA Crown Cork & Seal Toshiba Corporation Kvaerner ASA Atlantic Richfield RTZ CRA g Mannesmann AG Pharmacia & Upjohn GTE Corporation American Home Products Eridania Beghin-Say SA Société au Bon Marché Source: UNCTAD/Erasmus University database.3 61.8 40.0 3.8 7.8 5.1 66.7 8.2 21.7 15..5 92.8 7.2 21.3 80.4 12.1.5 30.9 2.9 6.3 8. Rubber and plastics Beverages/food Food Packaging Electronics Shipbuilding/ engineering Petroleum expl./ref.5 19..1 6. Pharmaceuticals Telecommunication Pharmaceuticals Food Beverages/luxury products 8.3 51.0 81.0 4.0 8.7 76.3 8.8 7.4 54.8 7.3 8.6 7.6 67..4 22.4 15..3 14. 1996 (continued) (Billions of dollars and number of employees) Assets Sales Transnationality by Ranking b y Employment Employment Total 13.3 7.0 9.8 29.V.0 7.. Industry classification for companies follows the United States Standard Industrial Classification as used by the United States Securities and Exchange Commission (SEC).9 12. Data on foreign assets are either suppressed to avoid disclosure or they are not available.5 52900 26000 38197 20000 31413 18900 .9 60.9 Foreign Total index inde x a (Per (Per cent) Country Countr y Netherlands United States Japan United States Belgium Japan Canada Belgium Japan United States France United States Japan Norway United States United Kingdom/Australia Germany United States United States United States France France Chemicals Motor vehicles Electronics Beverages Chemicals/pharmaceuticals Automotive Telecommunication Petroleum expl.8 26.2 9. e .4 15.. they are estimated on the basis of the ratio of foreign to total sales.9 9.3 44.World Investment Report 1998: Trends and Determinants 38 able world’ orld’s by foreign (continued) Table II.1 18.0 7.. they are estimated on the basis of the ratio of foreign to total sales. e . d 8.4 4.6 71./dist. foreign sales to total sales and foreign employment to toal employment.4 8.1 25. Mining Engineering/telecom. The world’s top 100 TNCs.7 8. e 69303 .6 8. foreign to total employment or similar ratios.8 15. e 9217 .2 24. Foreign sales are outside Europe whereas foreign employment is outside United Kingdom and the Netherlands.2 . e . .2 24.2 16.2 6. In case of non-availability./ref.3 7.2 4.0 31..5 39.8 8.6 16.5 11.3 7. Inc. sales and employment are outside the United Kingdom and Australia.8 8.8 18. Data on foreign employment are either suppressed to avoid disclosure or they are not available.1 10. In case of non-availability.8 19.4 8. d 7.6 15. a b c d e f g The index of transnationality is calculated as the average of three ratios: foreign assets to total assets.9 7.4 52.3 23. e 31616 41689 .6 12.2 38.1 7. Coca-Cola Solvay SA Mitsubishi Motors Northern Telecom Petrofina SA Bridgestone Pepsico. foreign to total assets or similar ratios.6 9.2 Industry Industr y b Foreign Total Foreign Foreign Transnationality assets index indexa Corporation 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100 21 99 55 29 5 90 13 24 53 84 50 41 94 12 95 54 73 33 100 72 17 60 Akzo Nobel N.4 20.6 12.8 11.8 9.. e 28300 14617 .2 22.2 14..6 46.0 14.. e 55987 ./dist.0 7.2 5.4 47. Foreign assets.8 9.6 .9 11.4 7.9 10.5 11.

percentage and number of employees) Change Chang e 1996 vs.II.8 Country composition. 2. European Union firms have also seen their share of foreign assets and foreign employment decline. Japan. b This includes companies that could not be considered in 1997 because of the late arr ival of a response to UNCTAD’s questionnaire. Their dominance has remained roughly unchanged since 1990.a by foreign ranked by foreign assets. 3 9 . whereas Japanese firms increased their share of foreign activities. foreign world's larg Figure II. This includes companies which could not be considered in 1997 because of late arrival of a response to UNCTAD’s questionnaire. sales.3 7.M. Newcomers to the world’s top 100 TNCs. Within the important five most important home countries. doubling it in Source: U N C TA D / E r a s m u s U n i ve r s i t y Source : UNCTAD/Erasmus University database.Chapter II able Newcomer wcomers world’ orld’s Table II. Since the list a Measured by foreign assets. 4. Générale des Eaux Akzo Nobel Bridgestone Corporation Crown Cork & Seal Kvaerner ASA Eridania Beghin-Say Société au Bon Marché Country Switzerland Italy Sweden France Netherlands Japan United States Norway France France able Departures from world’ orld’s Table II.4) of the world’s 100 largest TNCs shows a continuous trend towards greater transnationality -.in terms of foreign assets.a 1996 (Billions of dollars. 1996 Triad. b In per cent. as defined in footnote a) of table II. published in 1990. 1996 Ranked by foreign assets in 1995 38 84 85 90 93 94 97 98 99 100 Corporation Ciba-Geigy AGb Carrefour SCA Sara Lee NEC Corporation Thomson SA Imperial Chemical Industries (ICI) United Technologies RJR Nabisco Pechiney SA Country Switzerland France Sweden United States Japan France United Kingdom United States United States France Source: database. a snapshot (table II.1. The merger of Sandoz and Ciba-Geigy resulted in the new TNC Novartis. these were the principal developments: • able world’ orld’s larg Table II. Overall. regardless of whether one considers number of firms. and thus in the overall transnationality index. 1996 Ranked by foreign assets 26 42 55 77 79 87 90 92 99 100 Corporation a Novartis b Ferruzzi/Montedison Ericsson L. 85 of the top 100 TNCs were headquartered in the Triad. figure II. foreign assets. France and Germany alone accounted for three-quarters of the entries in both years. the United Kingdom. United States and Japan.4 3. The United States.1. 3. More specifically.a by foreign ranked by foreign assets. Snapshot of the world’s 100 largest TNCs. a U N C TA D / E r a s m u s U n i ve r s i t y Source: a b UNCTAD/Erasmus University database.1 and A. although they still account for the largest number (39) in the top 100 list.1. it has remained dominated by firms from the Triad (European Union. The change of the top 100 TNCs was first between 1995 and 1996 is expressed in percentage points. the number of firms from the European Union declined between 1990 and 1996 (mostly from France and the United Kingdom). In 1996.4 2. The world's 100 largest TNCs: the sales or foreign employment.2). Departures from the world’s top 100 TNCs.8 ariable Variab le Foreign assets Foreign sales Foreign employees Median index of transnationality b Total 1 808 2 149 5 939 470 54. 1995 6. The merger of Sandoz and Ciba-Geigy resulted in the new TNC Novartis. compared to 86 in 1990. see also in the annex tables A. and employment.II.

have grown much faster (figure II.2).2. foreign Figure II.5). The firm experiencing the largest increase in foreign sales was Hanson (United Kingdom) (figure II. 1995-1996 (Percentage) Source : UNCTAD/Erasmus University database. resulted in an increase in the ratio of foreign sales to total sales. • Foreign sales. A number of individual firms.5. whereas FIAT (Italy) experienced the largest fall in foreign sales (figure II. Top 5 decreases in foreign sales among world's the world's top 100 TNCs.4). • Foreign assets. Top 5 increases in foreign sales among world's the world's top 100 TNCs. The number of Japanese firms in the list rose by 50 per cent between 1990 and 1996. Total foreign sales of the top 100 TNCs amounted to $2. from 12 to 18. however. foreign Figure II. and a relatively slower rise in total sales.4.4). other firms saw their foreign assets shrink (figure II. This rise. the ratio of foreign assets to total assets increased marginally from 41 per cent in 1995 to 43 per cent in 1996.1 trillion in 1996 (table II. TOTAL’s (France) foreign assets rose by an outstanding 53 per cent between 1995 and 1996. from 48 per cent in 1995 to 52 per cent in 1996. This shrinking group is led by Volkswagen whose foreign assets fell by about a third between 1995 and 1996. followed by a slower growth of six per cent between 1995 and 1996. Top 5 increases in foreign assets world's among the world's top 100 TNCs. Another three firms lost more than a fifth. Source : UNCTAD/Erasmus University database.3. Conversely.World Investment Report 1998: Trends and Determinants employment. For all of the 100 TNCs. 1995-1996 (Percentage) foreign Figure II. Total foreign assets of the top 100 TNCs amounted to $1.3).4). and another three firms saw increases of 40 per cent or more.8 trillion in 1996 (table II. they had risen by around 30 per cent. an increase of seven per cent from 1995. 1995-1996 (Percentage) Source : UNCTAD/Erasm us University Source : UNCTAD/Erasmus University 40 . 1995-1996 (Percentage) foreign Figure II. Between 1993 and 1995. For example. Top 5 decreases in foreign assets world's among the world's top 100 TNCs.

Consequently. Top 5 decreases in foreign employment world's among the world's top 100 TNCs.most of which are highly concentrated industries. Food and beverages also includes B.9 million in 1996 (table II.4). on a global level. as far as assets . Firms operating in the electronic/ electrical industry make up the largest group in the top 100 (table II.6). smaller companies are expanding abroad faster than large ones. They constitute usually half of the entries in this top group since the list for 1990 was first able Industry Table II. are concerned. The companies with the largest increase in foreign employment are led by Michelin (France) (figure II. U N C TA D / E r a s m u s U n i ve r s i t y • Industry composition .5). During the same year.T. Two other firms registered increases of over 100 per cent. On the other hand. from 12. the reverse was true (table I. even if all TNCs are considered.5 per cent. Source: database. Industries (tobacco) and McDonalds.1 million to 11.5. Total foreign employment of the top 100 TNCs amounted to some 5. Chemicals also includes Ferruzzi/Montedison. 1995-1996 (Percentage) Source : UNCTAD/Erasmus University database. This pattern continued the trend of declining overall employment and rising foreign employment since the list was first published for 1990. The top 10 TNCs among the top 100 have been dominated by TNCs from the automobile and the petroleum industry.Chapter II Foreign sales of the top 100 TNCs grew faster than their foreign assets. and food/beverages industries -.7). Top 5 increases in foreign employment world's among the world's top 100 TNCs. total employment decreased by 3. foreign employment Figure II.1). five TNCs reduced their foreign employment by between 25 per cent to 57 per cent (figure II. 1995-1996 (Percentage) foreign employment Figure II.7.6. • Foreign employment.8 million employees.A. 1990 and 1996 (Number of entries) Industry Electronics/electrical equipment Chemicals and pharmaceuticals a Automotive Petroleum refining/distribution and mining Food and beverages b Diversified Telecommunication Trading Machinery & engineering Metals Construction Media Other Total 1990 14 18 13 13 9 2 2 7 3 6 4 2 7 100 1996 17 16 14 14 12 4 5 4 2 3 3 2 4 100 Source: a b UNCTAD/Erasmus University database. an increase of 2 per cent over 1995. petroleum and mining. 4 1 . Industry composition of top 100 TNCs. automotive. the ratio of foreign-to-total-employment rose from 48 per cent to 51 per cent. No particular patterns in terms of home countries or industries appear to explain this performance. They are followed closely by TNCs from the pharmaceutical/chemical. This suggests that.

Not surprisingly. their balance sheets show exclusively financial assets. branches. China. respectively (annex table A. suggest that. subsidiaries. as well as for other transition economies.for which. similar reasons. but this impression may at least partly reflect the incompleteness of data for that region.Hong Kong.171 and 153. and financial services are not included.as well as in the Republic of Korea. The international spread of banking The transnationalization of manufacturing firms is captured by the lists of the top 100 TNCs and top 50 TNCs based in developing countries. however. Services are under-represented.4). banks from the Republic of Korea have the largest number of entities in the OECD countries covered (76). although the latter are transnationalizing as well (box II. although incomplete and no more than partially illuminating about the transnationalization of the banking industry.7) have banking entities in a considerable number of developing and transition economies. and indeed have been doing so for some time (Fujita. The region with the smallest presence of OECD banks is Latin America. international trade between the host country of the agencies and the country of their parent banks. checks are paid. The principal exceptions are the electronics/electrical industry (which increased the number of its entries from 14 to 17). Not unexpectedly. The comparability of sales figures is even more complicated as it touches the question of the value added by banking services.e. or money is lent but at which deposits may not be accepted from citizens or residents of the United States” (sections 3101 to 3107). figures for agencies as well a). while the food and beverages firms increased their number of entries from 9 to 12 . Amongst the developing and transition economies. 1989). These lists also contain a number of services firms. and vice versa. Japan and the United States have the largest presence of banking entities in developing and transition economies: 116 and 113. statistics on the international distribution of banking entities (i.II. for the latter. All other industries are represented with at most five entries in the list. Germany and Japan is inflated by the availability for the United Kingdom and the United States of figures for representative offices (and. This distribution by industry of the top 100 has not changed significantly since 1990.II. the figures are inflated in relation to those of Asia and Latin America by the inclusion of representative offices -. if data were available on the transnationalization of banking assets and the sizes of the assets of different banks. but banks from Brazil are represented in the largest number of OECD countries (10) (annex table A.II. even when compared with the foreign presence of banking entities from OECD countries.II. an “agency” is defined as “any office or any place of business of a foreign bank located in any State of the United States at which credit balances are maintained incidental to or arising out of the exercise of banking powers.6).7). But there are also large presences from OECD countries in the Czech Republic and the Russian Federation . respectively (annex table A. the largest presence of banks from developing countries and transition economies in the OECD area is found in the United States and the United Kingdom -.World Investment Report 1998: Trends and Determinants published. whereas assets of manufacturing firms are largely of a real nature. The principal use of agencies is for the financing of. following the trend of concentration particularly in the pharmaceutical industry. representative offices) based on publicly accessible sources have been used.1). To assess the spread of banking. respectively (annex table A. one might well arrive at a different picture. But financial services firms do not easily lend themselves to inclusion in such lists. and provision of other services related to. the scale of this presence in relation to that in France. two financial centres -. In the case of banks.II. Conversely. They show that banks of selected (major) OECD countries (annex tables A. for example. the number of firms from the chemical/pharmaceutical industry was reduced from 18 to 16. those from developing economies as well as from economies in transition have already achieved a considerable international presence. Box II. forthcoming. However.are host to the largest number of banking entities from the OECD countries: 108 and 87. In the United States International Banking Act of 1978.5).4 to A. The metal industry reduced its entries in the list from six to three for. at least with regard to the number of banking entities in major markets. Of course. It should be noted that the list of the top 100 is dominated by manufacturing and primary sector firms. amongst others. The data.1.II. and Singapore -. 42 . Source: a Cornford and Brandon. Statistics that could answer these questions are only beginning to emerge.

employment and sales). 4 3 . independently of the amount of assets. industries and individual firms performing often in quite different ways. 2. An approach that measures this dimension of transnationality is captured in the network-spread index. For a TNC. a high network-spread index may be accompanied by higher costs of managing farflung operations (transaction costs).4). can be compiled in different ways. by choosing a single key variable (like assets) or by combining several variables (assets. even for the individual corporation. The growing internationalization of assets has contributed the most to the increase in the transnationalization index (TNI). the transnationalization index ranged from 97 per cent for Seagram to 16 per cent for GTE in 1996. or a combination of ownership and internalization advantages with a broader portfolio of locational assets. a high value could also indicate strong international competitiveness on the part of the home country firms. annex table A. foreign sales/total sales and foreign employment/total employment. sales and employment located in it. this is quite similar to 1990. A high value of this index. While this represents an increase of 4 percentage points over 1995.Chapter II Below the surface of a slowly progressive transnationalization of the top 100 TNCs a diverse picture emerges. Measurement of transnationality Transnationality is a function of the extent to which a firm’s activities are located abroad. The value of this index for the top 100 as a group was 55 per cent in 1996 (table II. The main drawback of this approach is that the index does not take account of the magnitude of a company’s activity in a given host country: each host country is counted once.2). The WIR uses the latter method (approach I. This diversity is also visible when it comes to the degree of transnationality of firms and industries.g. e. A drawback of this index is that it does not take into account the size of the home country and does not distinguish between TNCs whose foreign activities are concentrated in a few foreign countries. In 1996. /.a At the level of a corporation.8). until then it had not changed significantly since 1990 (figure Avera verag index Figure II. A transnationality index. the value of world's larg the world's 100 largest TNCs. sales and employment for each host country. and TNCs whose activities are spread across numerous host countries. 2. but it may also indicate high levels of ownership advantages as well as high levels of knowledge of market conditions in many countries. The index of transnationalization used here is a composite of three ratios -foreign assets/total assets. For the top 100 TNCs as a whole. a high network-spread index can be an indicator of both negative and positive elements. and helps to assess the degree to which the activities and interests of TNCs are embedded in their home economy or in economies abroad.8. The overall index hides a number of variations. Nestlé Source : UNCTAD/Erasm us University Box II. as corporations do not regularly report assets. which is constructed precisely to reflect the number of host countries in which a firm is established. Degree of transnationality The degree of international involvement of a firm can be measured in various ways (box II. 1990-1996 that index had even decreased. This drawback cannot easily be remedied.II. however. Average transnationality index of II. The conceptual framework underlying this index (and other similar indices) is based on the dichotomy between foreign versus home country activities. However. when the range was 97 for Nestlé to 15 for General Electric.. particularly if accompanied by low levels of inward investment.. may raise questions about a home country’s locational advantages. with home countries. under certain circumstances. in fact between 1990 and 1993.8).

The index N/N* is the network-spread index. and the extent to which firms take advantage of economies of scale and scope and can substitute trade for FDI. The corresponding value of the network-spread index for services and trading is 30 per cent and for construction and construction material is 17 per cent. p. the age and experience of firms in foreign markets.for the international competitiveness of firms. 44 .II. that country has the highest value for the network-spread index (annex table A. 144 TNCs ranked 23 per cent in 1993 (Dunning. More generally.II. while the top 100 TNCs are quite transnationalized. it would score very high (100 per cent) on the network-spread index and quite well (50 per cent) on the transnationalization index. One indicator that has been used in this respect is R & D. N* is estimated as the number of countries that are in receipt of inward stock of FDI minus 1 (to exclude the home country of the TNC).8. they do not exhibit a broad geographical spread. This underlines the fact that TNCs can transnationalize considerably without having to spread their foreign assets extensively (see annex table A. a company could have warehouses in each of the world‘s economies amounting to half of its assets. the company could have located affiliates. Both indices are. concluded) A correlation analysis of the transnationalization index and the network-spread index for the top 100 TNCs yields a rather low rank-correlation coefficient (0. United Kingdom. N* is equal to 178. To capture the depth of the transnationalization process requires the development of additional indices. firms from smaller economies seem to rely on geographically more diversified corporate networks. In addition. the United States and Japan. a b The number of countries in which a company has foreign affiliates is denoted as “N”.quite limited. in a sense. Accordingly. the extent and pattern of regional integration and liberalized entry provisions for FDI. it is more likely that a TNC reaches significant shares of foreign assets.9). the size of the home market. N* is chosen to be the number of countries in the world that have inward FDI. reflecting a phenomen also observed at the aggregate level. The differences in the values of the two indices suggest that. correspondingly. 1996.would probably capture the geography of a firm’s expansion more accurately. Exxon. approximations of the importance of taking advantage of a portfolio of locational assets -. At the same time. than that it reaches a high value in the network-spread index.an important source of the competitiveness of firms in a globalizing world economy (UNCTAD.II. In practice. In other words. it is more likely that a firm reaches. e. Given that TNCs investing abroad typically direct their investments towards major markets and not necessarily at every market. The average number of countries in which the top 100 TNCs in a particular industry operate ranges from 54 for food and beverages (including tobacco) to 31 for trading and construction. Volkswagen.10). Conversely. 1995a) -. Switzerland and Sweden).in this case -.5). Such suggests that the large size of these countries’ domestic economies may have allowed their TNCs to realize some of their competitiveness and growth potential at home. the highest degree of transnationality and the widest spread of activities is found in TNCs originating in smaller economies and/or in economies that have a long history of outward FDI (the Netherlands. This might well be an advantage in the age of globalization. the average transnationality index ranges from 81 per cent for construction and construction materials to 35 per cent for services and trading (annex table A. annex table A. potentially. 2. forthcoming. the transnational index and the network-spread index capture different aspects of a corporation’s transnationalization. sales and employment. 50 per cent on the transnationality index than that it invests in half of the world’s economies. its degree of integration into the host economy is -. It should also be noted that the actual values in the indices used are also influenced by a number of factors that are not taken into account in their calculation.. An index in percentage terms (and thus comparable to the transnational index) is derived by taking N as a percentage of N*. Furthermore. say.11). In no industry is the network-spread index higher than the transnationality index. Nissan and McDonald’s). sales and employment captured by the transnationalization index is complemented by the extent of geographical diversity captured by the network-spread index.assuming data availability -. and thereby a significant degree of transnationality. At the industry level. examples are firms such as Seagram. as well as on a higher degree of transnationality to stay competitive and to compensate for smaller home markets. TNCs from two of the most important home countries. on the basis of the data in the WIR 97.II.40. For instance. It should be noted that both the transnationalization index and the network-spread index provide only for an imperfect and broad indication of the “depth“ of a TNC‘s involvement abroad. therefore they provide information about the comparative international competitiveness of firms. Source: Ietto-Gillies. On an index developed for this purpose. the number of foreign countries in which. The importance of foreign assets. indices calculated on a regional basis -. Netherlands-based TNCs operate in the highest number of countries and.11). rank very low on both the transnational and network-spread indices (annex table A.World Investment Report 1998: Trends and Determinants (Box II.g.b In sum.II.

able world’ orld’s transnationality. The ten TNCs with the highest transnationalization index show values of between 85 and 97 per cent. Source: database. Unilever and Roche come from small countries. the average transnationality index for the top ten firms located in larger countries decreased from around 54 per cent to around 49 per cent (table II. The top 5 rises in transnationality world's larg among the world's largest TNCs.10). 1995-1996 (Percentage points) Figure II. The world’s top 10 TNCs in terms of degree of transnationality. countries with a GDP of less than $ 500 billion in 1996. Solvay.1 87. Belgium. The top 5 falls in transnationality world's larg among the world's larg est TNCs.6.9. such as Switzerland.7 87. such as ABB.6). foreign sales to total sales and foreign employment to total employment. a Canadian beverages company with interests increasingly geared to the entertainment and publishing industries. A number of firms (led by Hanson of United Kingdom) saw considerable rises in transnationalization (figure II. the average transnationality index of the top ten firms from small countries increased from an already high 77 per cent to an even higher 79 per cent. Sweden and the Netherlands.0 84. Companies whose transnationality index changed very little during 1990-1996 include Saint-Gobain (France). Table II.7): firms with the highest transnationality index.e.Chapter II lost its leading position in transnationality to Seagram (table II. 4 5 . Figure II. U N C TA D / E r a s m u s U n i ve r s i t y The list of the leading ten TNCs by degree of transnationality (table II. This is representative of a wider phenomenon (table II.6) is dominated by firms from small industrial countries.9 1 2 3 4 5 6 7 8 9 10 34 12 11 50 83 56 62 18 21 52 Source : a UNCTAD/Erasmus University database. 1995-1996 (Percentage points) Source : UNCTAD/Erasmus University database.7). while others (led by Volvo of Sweden) experienced declines of up to 15 percentage points (figure II.3 96. The index of transnationality is calculated as the average of the ratios: foreign assets to total assets.10.1 95. Electrolux.9). Over the 1990-1996 period.9 92. 1996 by Ranking by Transnationality Foreign assets index inde x a Corporation Seagram Company Asea Brown Boveri (ABB) Nestlé SA Thomson Corporation Solvay SA Holderbank Financiere Electrolux AB Unilever Roche Holding AG Michelin Country Countr y Canada Switzerland/Sweden Switzerland Canada Belgium Switzerland Sweden Netherlands/United Kingdom Switzerland France Industry Industr y Beverages Electrical equipment Food Printing and publishing Chemicals/pharmaceuticals Construction Electrical appliances Food Pharmaceuticals Rubber & Plastics Transnationality index inde x a (Per cent) 97.8 88. Nestlé.3 94. i.2 89. During the same period.

6 Number of entries 20 83 103c 1996 Average TNI 74. the foreign assets’ share of total assets is very low (for five of them. too.8).9 43.2 29. electronics the smallest. Nissho Iwai (Japan) and Hoechst (Germany). by Ruigrok and van Tulder in 1995 (figure II. able index for larg Table II.1 100 67.0 54.8 21.5 13. Average in transnationality index of the top 5 Avera verag index each industry TNCs in each industry.11 and annex table A. New Zealand (was no entry in 1996).0 53.8 19.6 - Source : UNCTAD/Erasmus University database and OECD.0 50. Large (GDP of more than $ 600 billion in 1996): Canada. The transnationality index of the top five electronics and pharmaceutical firms hardly changed.7 18.8 39. For some industries. United States.2 65. e.3 51 Top 10 average 77.II. Republic of Korea (there was no entry in 1990). Sweden. Food and beverages (67 per cent) tops the list. Chemical firms exhibited the largest gains. shows great variations (table II. a b c Small (GDP of less than $ 500 billion in 1996): Australia. implying that the higher transnationalization-index ratings are mostly reached by foreign sales and employment shares.World Investment Report 1998: Trends and Determinants Daimler-Benz (Germany). petroleum and mining Telecommunications Automotive Diversified Trading TOTAL (Per cent) Foreign assets (Billion dollars) Foreign assets as per cent of top 100 f oreign assets 9. Royal Dutch Shell are included in both catagories for the years 1990 and 1996.g. All indications are that the forces of globalization will lead to an increase in the degree of transnationality of firms (box II.4 52. trading (29 per cent) is at the bottom. Averages in transnationality and foreign assets.8.3). Switzerland and Venezuela (no entry in 1990). The top five trading companies remain amongst the least internationalized.808 Source : UNCTAD/Erasmus University database. RTZ CRA is included in both catagories only for the year 1996.8 a 171 247 141 357 331 50 381 73 56 1.3 62.8 Top 10 average 79. United Kingdom.3). 1996 verag Avera g e transnationality Industry Industr y Food and beverages Chemicals and pharmaceuticals Miscellaneous Electronics and electrical equipment Oil. a Only industries that have at least five entries and in which the same 5 top TNCs featured in the lists of the top 100 TNCs in 1990 and 1996.8 52.7 7. Norway. Germany.11. Italy. France.7.0 48. 1990 and 1996 (Percentage and number of entries) Number of entries Small a Large b Totals 21 81 102 c 1990 Average TNI 70.1 47. Figure II. 46 . The degree of transnationality of the top five firms in all industries that are represented by at least five firms in the lists of 1990 and 1996 increased over the 1990-1996 period. industry by industry. Unilever. the Netherlands. The industry picture. whereas the top five petroleum firms (closely followed by chemical firms) have the highest transnationality index of all industries. below ten per cent). able Avera verag foreign Table II. Belgium.0 3.1 4.7 54.7 46.3 2. Transnationality index for small and large home economies.a 1990 and 1996 (In percentage of top 100 total) Source : UNCTAD/Erasmus University database. albeit unevenly and more modestly than has been suggested in some studies on the globalization of industries and firms. Japan. a Average.

replacing twelve exits (table II.3. Transnational integratiion (Percentage of responses received) Source: Invest in France Mission. from 36 per cent to 42 per cent in gross investment. Panamerican Beverages (Mexico). Transnationalization indicators (Percentage of responses received) Box Box figure 2.11). supplemented by about 100 direct interviews. China. The 1996 top 50 TNC list includes twelve new entrants (table II. between 1996 and 2002. But. suggests that the trend towards a further transnationalization of firms will continue in the medium term. a rising number of companies will establish genuine transnational production and sales networks. changes in positions at the lower end of the list are also few. ranked second in 1996 (table II. B. and from 32 per cent to 41 per cent in assets (box figure 1). 1998. independently of the size. Ar thur Andersen and United Nations. overall. 4 7 . from 35 per cent to 45 per cent in production. sector and location of the TNCs. As with the top 100 TNC list. compared with a minority in the early 1990s. a company from Hong Kong.Chapter II Transnationalization Box II. As a result.12). Source: Invest in France Mission. 1998. Daewoo (Republic of Korea) leads the list (table II. this proportion had risen to 56 per cent in 1996 and could reach 78 per cent in 2002.10). Further below. Box indicators Box figure 1. topped the list in 1996: Orient Overseas International. In the transnationality index. LG Electronics (Republic of Korea) fell to rank 18 from 5 and was replaced by Sappi Limited (South Africa). ranked by foreign assets did not change in 1996: as in 1995. mobility on the top 50 TNC list appears to be higher than on the top 100 TNC list. Transnationalization in the medium term A survey carried out between July and November 1997 among 300 managers of TNCs and international experts around the world. while the proportion of those considered “little coordinated internationally” had fallen from 67 to 22 per cent between 1990 and 1996 (box figure 2). the company holding the top position last year. however.9). from 34 per cent to 42 per cent in employment. Ar thur Andersen and United Nations. Only 33 per cent of the respondents to the survey considered their companies “completely global” or “highly coordinated internationally” in 1990. More specifically. the contribution of foreign activities to respondents’ business is expected to rise from an average of 47 per cent to 56 per cent in sales. followed by Petróleos de Venezuela (PDVSA) (Venezuela). The largest TNCs from developing countries The top two positions in the list of the largest 50 TNCs headquartered in developing countries.

6 Transportation 1574. .6 25.0 23456.6 Mining 1599.0 5080.4 75.8 10302.0 1567.0 25837.0 45402. .3 28..f 12122 10213 3396 .4 26370.0 Electronics 2083./distribution 1876. Corp..0 Transportation 1255.A.4 4743. Cervejaria Brahma South African Breweries Tatung Co.0 37501 12756 9783 37393 8744 .7 12. China Republic of Korea Hong Kong.1 Diversified 887..2 5116.A.. & Exp.3 30793. . (CTC) Sunkyong Group YPF S.5 44.4 .0 4645. Petróleo Brasileiro S/A Petrobras Cathay Pacific Airways Samsung Electronics New World Development Hyundai Engineering & Construction Co. e 329. Cemex S.9.0 3241. China Petroleum expl.1 890.6 19.0 3010.8 8404.0 .0 3761.6 1327. Compãnia de Telecomunicaciones de Chile S.1 39.2 28.0 5259.0 Diversifies/construction 2810.4 8174. . 1996 (Millions of dollars and numbers of employees) Assets Country Countr y Republic of Korea Venezuela Mexico Hong Kong.3 17891.0 9941.0 864. China Brazil South Africa g Taiwan Province of China Philippines Singapore Engineering/construction 2287.0 5937.0 1993.5 23 39 20 19 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 32 31 13 47 43 18 28 2 3 8 1 14 46 40 29 42 38 Daewoo Corporation c Petróleos de Venezuela S.0 768.f 140000 47609 59318 20527 52880 21055 44000 200000 by Ranking by Industry Industr y b Foreign Total Foreign Total Foreign Total inde x a index (Per (Per cent) 54.6 46.1 61.7 3978...2 16.d Beverages 985.d 3380.0 16662.0 42094.5 1508. First Pacific Company Sappi Limited Acer Group Jardine Matheson Holdings China National Chemicals.4 13.2 32504.9 1400.0 5730.0 33854.0 1032.0 828 . e 471. China Brazil China Singapore Hong Kong.0 12413.0 7025.0 628.d Hotel/construction 2321.7 3438.0 1882.3 7968.f 4997 2500 2139 22 4038 .A.1 3124./distribution Construction Electronic parts Paper Electronics Conglomerate/diversified 14933.3 .0 Petroleum expl.2 15950 30889 72 8100 86 1623 2818 10500 . China Singapore Hong Kong.9 Beverages 1357.8 7965..f 31440 6466 2500 8982 33299 9762 43468 15757 59086 45000 Diversified/trading Petroleum expl.4 Diversified/trading 3201.5 4...0 2468.3 5122.. China State Construction Engineering Corp.6 71. .5 2248.9 329./refin.0 26758.0 Diversified . Imp. ./refin.7 4151..5 2008.2 33736..A./refin.0 8584..6 .6 Utilities 2735.3 6967.0 11605..1 Transportation 2555. .7 8002.0 90. China Hong Kong.0 6317.2 6134.0 2162.0 /.1 17.1 23219.0 14070.8 4846. .4 35.9 4938.6 Trading/distr. San Miguel Corporation Keppel Corporation 1461.2 59.0 10238./distribution 2583.3 36.8 1342.0 8901.4 4532.0 Miscellaneous 1392.0 3699.1 16.5 16.0 2429.0 Electrical equipment .6 17955..0 1306. China Mexico/Panama Hong Kong. The top 50 TNCs from developing countries ranked by foreign assets.0 8491.6 Beverages/hotels 959. LG Electronics Petroliam Nasional Berhad Citic Pacific Ltd.6 Energy/trading/chemicals 2693.0 4385. Dairy Farm International Comp.0 2316.9 53.f 573 15006 . China South Africa g Taiwan Province of China Bermuda China China Chile Republic of Korea Argentina Brazil Hong Kong.0 Electronics .5 36.2 Petroleum expl./distribution 2650.4 40. Companhia Vale do Rio Doce China Shougang Group Singapore Airlines Hutchinson Whampoa Panamerican Beverages Guangdong Investment Fraser & Neave Limited Orient Overseas Intern. d Beverages 903.0 6630.0 Diversified/metals 1582.8 49.6 6166.3 36.5 3365.1 16076.0 31659.8 5271.8 61./motor vehicles/supplies 1678. e 124.0 3652.8 1178.0 58.0 7788. .7 16.0 .0 12084.6 13478.0 1718.0 1705.0 4406.d Beverages 1436..0 2027.7 25.4 1648..f 3994 4057 28000 65284 13640 11750 15483 221961 12966 27733 31400 13531 11955 4030 49900 8769 106900 27250 28544 14320 37.6 81.5 12.0 2023.0 1274.0 1590.World Investment Report 1998: Trends and Determinants 48 able from developing by foreign Table II. e 8187. . .9 6456.8 2061.7 3760.0 8912.8 Sales Employment Emplo yment Transnationality Foreign Transnationality assets index indexa Corporation 1 2 3 4 5 6 7 8 9 15 11 4 5 22 6 21 9 17 10 7 11 12 13 45 36 50 14 15 16 17 Republic of Korea Republic of Korea Malaysia Hong Kong.8 Retailers ./refin.0 836.2 6100.

0 559.4 1045. Consolidated data are provided.0 3937.A. 1996 (continued) (Millions of dollars and numbers of employees) Assets Transnationality by Ranking by Sales Foreign Total Foreign Total index inde x a (Per (P er cent) Employment Emplo yment Country Countr y Industry Industr y b Foreign Total Foreign Transnationality assets index indexa Corporation 35 33 China National Metals & Minerals Import & Expor t Corp . de C.0 6746.6 18.0 758.5 554.0 343.0 2136.8 32.1 34. .V.0 1449. they are estimated on the basis of foreign to total sales. Data on foreign sales are either suppressed to avoid disclosure or or they are not available. Compãnia de Petróleos de Chile Malaysian Airline Berhad Gruma S.8 5705.0 5294. Data on foreign employment are either suppressed to avoid disclosure or they are not available.able from developing by foreign (continued) Table II. .2 43. Industry classification for companies follows the U.0 1174.0 2123.5 5440.0 472.0 16.1 10611.4 602. Sime Darby Berhad Dong-Ah Construction Ind. foreign to total employment and similar ratios for the transnationality index. foreign sales to total sales and foreign employment to total employment.5 1607.0 2891.8 53.A. In case of non-availability. In case of non-availability.8 3386.0 609. a b c d e f g The index of transnationality is calculated as the average of the three ratios: foreign assets to total assets.0 552.0 1752..2 773.7 16. Hongkong And Shanghai Hotels Souza Cruz S.f 1449 1300 140 3126 109 891 . China Malaysia Republic of Korea Hong Kong.6 833.9 2128.2 477. they are estimated on the basis of the ratio of foreign to total assets.0 51.9 726.0 5120.7 7. In case of non-availability.0 64.0 1386.0 801. Chapter II 4 9 .9 29. Empresas CMPC S.0 311. Bavaria S..6 20.3 1557.0 522.9.0 2997. .5 1282. automotive & furniture 884.4 4312. Data on foreign assets are either suppressed to avoid disclosure or they are not available.0 421.0 3086.f 6222 7932 4274 2972 2002 10533 1288 36421 6583 4083 16778 29975 5957 9876 8389 13788 12160 30740 33428 13031 10294 19300 25.e 47.0 17.A. The top 50 TNCs from developing countries ranked by foreign assets.8 2958.9 Source: UNCTAD/Erasmus University database. China Brazil Chile Malaysia Mexico South Africag Mexico Colombia Chile South Africa g Diversified/trading Diversified Construction Retailers Chemicals Food Hotel/property Diversified Petroleum expl. China India Brazil Hong Kong.0 1591.0 3523..A.1 29.0 390.2 451.3 182 8132 .7 626.S. 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 30 24 25 49 41 26 34 48 12 16 27 44 37 35 10 Plate Glass & Shatterprufe Ind.1 4950.9 19.0 560.6 2431.A.0 2198.9 372.0 2388. .3 1328. Data for some important mining companies were not available.d 804.0 625.2 . Standard Industrial Classification which is used by the United States Securities and Exchange Commission (SEC).. they are estimated on the basis of the ratio of foreign to total sales.2 8./refin.1 79. Wing On Company Reliance Industries Sadia Concordia S. foreign to total assets and similar ratios for the transnationality index. Within the context of this list South Africa is treated as a developing countr y.0 .7 26. foreign to total employment and similar ratios for the transnationality index.4 2072.A./distribution Transportation Food Diversified Miscellaneous Beverages Pulp & paper Building.0 392. Barlow Limited Vitro S.0 1766.

Standard Industrial Classification which is used by the United States Securities and Exchange Commission (SEC). Source: a UNCTAD database. Transnationality index inde x a (Per cent) 90. China Chemicals.13. Reliance Industries Souza Cruz S. a b This includes companies that could not be considered last year because of late arrival of a response to UNCTAD’s questionnaire. 50 .1 14.. Newcomers to the top 50 TNCs from developing developing countries. Snapshot of the top 50 TNCs from able from Table II. 1996 by Ranking b y Transnationality Foreign assets Index Inde x a 1 2 3 4 5 28 25 26 4 5 UNCTAD database. Within the context of this list South Africa is treated as a developing country. Within the context of this list South Africa is treated as a developing country.10. it has been dominated by firms from a few countries. China Mexico/Panama Hong Kong. As defined in footnote a) of table II.5 3. Singapore Telecommunications Ltd. Compania de Petroleos de Chile Malaysian Airline Berhad Bavaria S.World Investment Report 1998: Trends and Determinants able from developing transnationality. Grupo Televisa S. Petroliam Nasional Berhad Singapore Airlines Orient Overseas Intern.216 35. dominance has remained largely unchanged since 1993. Countr y China China Singapore Mexico China Malaysia China Singapore Taiwan Province of China Mexico Taiwan Province of China Republic of Korea Source: UNCTAD database.0 71.13. (Billions of dollars. Their relative .V.1 ariable Variab le Foreign assets Foreign sales Foreign employees Median index of transnationality b Total 104 338 1. The top 5 TNCs from developing countries in terms of degree of transnationality.8 61. Corp.11.1 Source : a b UNCTAD database. percentage and number of employees) Change Chang e 1996 vs. Industry classification for companies follows the U. able Departures from from Table II.A.13) of the 50 largest TNCs from developing countries shows a continuous trend towards greater transnationalization: Table II.615. Since the top 50 TNCs list was first published in 1993. Plate Glass & Shatterprufe Ind.a 1996 by Ranked b y f oreign asset s Corporation 5 10 17 19 23 28 39 42 43 44 48 50 Sappi Limited Compãnia de Telecomunicaciones de Chile Hyundai Engineering & Construction Co. & Exp. and foreign employment to total employment. de C. China South Africa c Industry Industr y b Transportation Beverages Miscellaneous Electronic parts Paper Source: a b c The index of transnationality is calculated as the average of the three ratios: foreign assets to total assets. the Republic of Korea. China India Brazil Chile Malaysia Colombia South Africa b Corporation China State Construction Engeneering Corp. China Hong Kong. to a lesser degree. Snapshot of the top 50 TNCs from developing developing countries. As in the case of the world’s top 100 TNCs.A. For the first two economies -.Hong Kong.9. Panamerican Beverages Guangdong Investment First Pacific Company Sappi Limited Country Countr y Hong Kong.a 1996 • Country composition . Measured by foreign assets. 1995 31. Change is measured in percentage points. Table II.6 81. Departures from the top 50 list of TNCs from developing developing countries. a snapshot (table II. Chinese Petroleum Grupo Celanese SA Formosa Plastic Group Ssangyong Cement Industrial Co. Ltd.12.4 75. and.A. able Newcomer wcomers from Table II. Imp. China Metals and Minerals Genting Berhad China Shougang Group Creative Technology Ltd..S.2 16. foreign sales to total sales. mainly Hong Kong. by Mexico and Brazil. This includes companies that could not be considered because of late arrival of a response to UNCTAD’s questionnaire. China.a 1996 by Ranking b y f oreign assets 9 13 15 18 33 35 40 43 45 46 47 50 Country Countr y South Africa b Chile Republic of Korea Malaysia Singapore Hong Kong.5 Corporation Orient Overseas Intern.

foreign Figure II. and by a further 31 per cent between 1995 and 1996.14 shows the top five TNCs with the largest decreases. This trend partially reflects a catching-up effect. The latter increase. from $79 billion to $104 billion. Country breakdown of the top 50 TNCs from developing by number for countries by number of entries for 1993 and 1996 China and the Republic of Korea -.13 shows the top five TNCs from developing countries with the largest increases in foreign assets. foreign assets. Between 1993 and 1995.II.14.12. Figure II. represents a relative slowdown compared with the overall increase between 1993 and 1995. Estimated growth rate.12).13.the dominance remains regardless of whether the absolute numbers of firms. as the top 50 developing countries' TNCs implement strategies to exploit their foreign Figure II. although considerable. the top 50 developing countries‘ TNCs have built up their foreign assets almost seven times faster during the period from 1993 to 1996 than the top 100 TNCs did (see also foreign employment below). a b The foreign assets of only 4 TNCs declined in the period. 5 1 . Total foreign assets of the top 50 developing countries‘ TNCs amounted to $103 billion in 1996. figure II.Chapter II Country breakdown from developing Figure II. Top 5 increases in foreign assets among from developing the top 50 TNCs from developing countries. Top 4 decreases in foreign assets among from developing the top 50 TNCs from developing countries. a Estimated growth rate. 1995-1996 (Percentage) Source : UNCTAD database. The overall ratio of foreign assets to total assets increased from 17 per cent in 1995 to 22 per cent in 1996. Foreign assets. they increased by around 280 per cent.a 1995-1996 (Percentage) Source : UNCTAD database. Even though the ratio of foreign to total assets is about half of the ratio of the top 100. foreign sales or foreign employment are considered (figure II. see also annex table A.12. • Source : UNCTAD database.

18 1995-1996 shows the five TNCs with the largest (Percentage) decreases in foreign employment.000. while in 1993. Source : UNCTAD database. Top 5 increases in foreign employment TNCs with the largest increases in from developing among the top 50 TNCs from developing countries. These trends of declining or stagnating overall employment and simultaneously increasing foreign employment are common to the top 50 TNCs and the top 100 TNCs.1 • Foreign sales .17 shows the five foreign employment Figure II. Consequently.000. Top 5 decreases in foreign sales from developing among the top 50 TNCs from developing countries.) This large increase is not surprising given the huge build-up of foreign assets between 1993 and 1995. see figure II. This rise of 14 per cent. Estimated growth rate. to about 1.15.16 for the top five decreases in foreign sales. China) enjoyed the highest rise in transnationality index between 1995 a • Source : UNCTAD database. from 34 per cent in 1995 to 41 per cent in 1996. and a simultaneously less dynamic increase of total sales.World Investment Report 1998: Trends and Determinants growth potential and competitiveness through increased transnationalization and the acquisition of a portfolio of locational assets. During the period 1993-1996. similar to the trend displayed by the top 100 TNCs. compared to $120 billion in 1995. resulted in an increase in the ratio of foreign sales to total sales. that figure was about 548.17.240.15 for the top five increases and figure II. 1995-1996 (Percentage) Source : UNCTAD database. Transnationality. Figure II. (For detailed company information. foreign employment. Total foreign employment of the top 50 developing countries‘ TNCs rose by almost 17 per cent between 1995 and 1996. the ratio of foreignto-total-employment rose from 11 per cent in 1993 to 34 per cent in 1996. and figure II. total employment increased by only three per cent.16. foreign Figure II. Top 5 increases in foreign sales from developing among the top 50 TNCs from developing countries. • Foreign employment. Wing On Company International (Hong Kong. The build-up of foreign employment is very much in line with the buildup of foreign assets and foreign sales. 1995-1996 (Percentage) foreign Figure II. 52 . Total foreign sales of the top 50 developing countries‘ TNCs amounted to $137 billion in 1996.

7 35. 5 3 .0 Source : a UNCTAD database.3 19.7 5. the top 50 TNCs and top 100 TNCs in their transnationalization indices of the petroleum and mining industry is also remarkable: 19 versus 52.2 32. 1995-1996 from developing (Percentage) Figure II. 14. petroleum and mining Chemicals and pharmaceuticals Automotive TOTAL Foreign assets (in billion dollars) 2. by industry Table II.1 47. by industry.3 5.18. 1995-1996 (Percentage) Source : UNCTAD database.0 30.4 54. construction and trading industries are the most transnational industries among the top 50 TNCs. The telecommunication.9 6. and 1996 (figure II.4 44. a Estimated growth rate.20).1 37.6 5. Top 5 falls in transnationality among the top 50 TNCs from developing countries.3 6.2 5. where food and beverages.3 13. This result contrasts with the findings for the top 100 TNCs (table II. The difference between Figure II. engineering Electronics and electrical equipment Tourism/hotel Food and beverages Diversified Oil. 1996 verag Avera g e transnationality (Per cent) 59. transportation.1 18. and Gruma (Mexico) experienced the largest fall (figure II.8). able Avera verag from developing transnationality. Estimated growth rate.2 6. 1995-1996 (Per cent) Source : UNCTAD database.8 7. Averages among the top 50 TNCs from developing countries in transnationality.Chapter II foreign employment Figure II.3 31.8 100.9 7. machinery. with transnationality indices of almost 60 per cent to 45 per cent (table II.8 103. Top 5 rises in transnationality among the top 50 from developing TNCs from developing countries.20. Top 5 decreases in foreign employment among from developing the top 50 TNCs from developing countries.1 a Industry Industr y Telecommunications Transportation Construction Trading Miscellaneous Steel.2 2.4 7.8 32. as well as chemicals and pharmaceuticals rank significantly higher than they do for the top 50 TNCs from developing countries.2 13.6 35.6 33.14).3 Foreign assets as per cent foreign of top 100 f oreign assets 2.1 17.7 6.6 0. a Source : UNCTAD database.6 38.19). Average.4 2.2 0.6 2.6 2. a Estimated growth rate.19.

15. There is no clear indication that one industry sector is leading the trend. data available for the top 50 developing countries‘ TNCs do not lend themselves to the calculation of a network-spread index as was developed for the top 100 TNCs. all other industries have less than five entries in the list./distr. corporations in food and beverages. 54 . Apart from diversified TNCs. 1993.World Investment Report 1998: Trends and Determinants • Industry composition . The high proportion (22 per cent) of diversified TNCs in the top 50 TNC list contrasts with the low proportion of diversified TNCs (five per cent) in the top 100 TNC list. Department of Economic and Social Development. Industry composition of top 50 TNCs from developing from developing countries in 1993 and 1996 (Number of entries) Industry Total Diversified Food and beverages Petroleum ref. Unfortunately.2 Source : U N C TA D Notes 1 2 On the growth of TNCs from developing countries. able Industry Table II. the process of transnationalization continues gradually for the top 50 TNCs. Expansion as well as occasional retreat is rather evenly distributed over all industries. and mining Electronics/electrical equipment Other Trading Transportation Construction Tourism/hotel Steel. see United Nations. machinery & engineering Chemicals and pharmaceuticals Automotive Media 1993 50 9 8 2 7 5 1 1 6 4 4 1 1 1 1996 50 11 8 6 5 5 4 4 3 2 1 1 - As noted for the top 100 TNCs.15). petroleum and electronics/ electrical equipment industries dominate the top 50 TNCs (table II.

In 1997 alone. National policies Over the past four decades. which have generally complemented trends at the national level. Cum ulative n umber of countries and territories with investment laws or special FDI regimes.1. Source : chapter III. countries in all regions have come to adopt FDI-specific regulatory frameworks to support their investment-related objectives. 1. table III.1 and table III. 17 countries introduced new foreign Cumulative number Figure III. since the early 1980s. Initially.1 and every year a number of existing regimes are amended.Chapter III CHAPTER III INVESTMENT POLICY ISSUES Trends A. at least 143 countries and territories had enacted FDI-specific legislation (figure III. Trends The trend towards a liberalization of national investment regimes has been accompanied by intensified international discussions and negotiations on FDI rules. 55 . however. By 1997. and another 59 introduced regulatory changes with respect to one or more specific items affecting FDI.1). many investment laws were intended to control the entry and operations of foreign investors.1. 1953-1998 substantially changed existing laws.

the year in which the prevailing legislation was adopted is indicated in parenthesis. Refers to a law or decree dealing specifically with FDI. Includes developing Europe. 1995) c Lao People’s Democratic Republic (1994) Malaysia (1994) Oman (1994) Afghanistan (1995) Bangladesh (1995) China (1995) Georgia (1995) Jordan (1995) Palestinian territory (1995) Kazakhstan (1997) Kyrgyzstan (1997) Micronesia. but are relevant to FDI. Countries and territories with special FDI regimes. 1994)c Lesotho (1969) Liberia (1973) Comoros (1982. Federated States of (1997) Uzbekistan (1998) Source: a b c UNCTAD. This table does not cover provisions contained in laws or regulations that do not deal specifically with FDI. 1994) c Sudan (1990) Mali (1991) Uganda (1991) Burkina Faso (1992) Congo (1992) Malawi (1992) Namibia (1992) Algeria (1993) Cape Verde (1993) Mauritius (1993) Mozambique (1993) Sierra Leone (1993) Tunisia (1993) Zambia (1993) Angola (1994) Djibouti (1994) Eritrea (1994) Ghana (1994) Côte d’Ivoire (1995) Guinea (1995) Nigeria (1995) Libyan Arab Jamahiriya (1996) Madagascar (1996) Egypt (1997) Ethiopia (1997) United Republic of Tanzania (1997) Pacific Asia and the Pacific Kuwait (1965) Republic of Korea (1966) Pakistan (1976) Cook Islands (1977) Tonga (1978) Maldives (1979) Saudi Arabia (1979) Bangladesh (1980) Bahrain (1984) Samoa (1984) Solomon Islands (1984) Qatar (1985) Viet Nam (1987) Myanmar (1988) Iran. Economies are listed according to the chronological order of their adoption of FDI legislation. 1995) c Australia (1975) Canada (1985) New Zealand (1985) Israel (1990) Spain (1992) Finland (1993) Ireland (1994) Portugal (1995) France (1996) Africa Central African Republic (1963) Kenya (1964) Seychelles (1967. The country has more than one set of legislation dealing with FDI.1. Note : 56 . Islamic Republi of (1990) Sri Lanka (1990) Taiwan Province of China (1990) Tuvalu (1990) Iraq (1991) Niue (1991) Philippines (1991) Syrian Arab Republic (1991) Thailand (1991) Yemen (1991) Azerbaijan (1992) Democratic People’s Republic of Korea (1992) Nepal (1992) Papua New Guinea (1992) Mongolia (1993) Turkmenistan (1993) Armenia (1994) Cambodia (1994) Indonesia (1994. a 1998 Latin America and the Caribbean Brazil (1962) Chile (1974) Argentina (1976) Barbados (1981) Panama (1983) El Salvador (1988) Bahamas (1990) Bolivia (1990) Trinidad and Tobago (1990) Colombia (1991) Nicaragua (1991) Peru (1991) Honduras (1992) Paraguay (1992) Venezuela (1992) Ecuador (1993) Mexico (1993) Cuba (1995) Dominican Republic (1995) Jamaica (1995) Uruguay (1998) Central and Europe Eastern Europe b Hungary (1988) Slovenia (1988) Albania (1991) Belarus (1991) Croatia (1991) Estonia (1991) Latvia (1991) Poland (1991) Romania (1991) Russian Federation (1991) Slovakia (1991) Bulgaria (1992) Czech Republic (1992) Republic of Moldova (1992) Ukraine (1992) The former Yugoslav Republic of Macedonia (1993) Lithuania (1995) Developed De veloped countries Greece (1953) Turkey (1954.Tr World Investment Report 1998: Trends and Determinants able Tab le III. 1992)c Morocco (1983. based on national reports and various sources. 1995)c Democratic Republic of the Congo (1986) Rwanda (1987) Senegal (1987) Somalia (1987) Botswana (1988) Gambia. The (1988) Gabon (1989) Mauritania (1989) Niger (1989) Togo (1989) Zimbabwe (1989) Benin (1990) Burundi (1990) Cameroon (1990.

1991-1997 Item Number of countries that introduced changes in their investment regimes Number of regulatory changes Of which: More favourable to FDI a Less favourable to FDI b 1991 35 82 80 2 1992 43 79 79 1993 57 102 101 1 1994 49 110 108 2 1995 64 112 106 6 1996 65 114 98 16 1997 76 151 135 16 Source : a b UNCTAD.3.in the direction of more favourable conditions for FDI more liberal entry conditions and procedures a more liberal operational conditions b and frameworks a more incentives more promotion (other than incentives) c more sectoral liberalization more guarantees and protection . b y type . based on national sources. based on national sources. 2 Of a total of 151 regulatory changes made in 1997 by 76 countries. The legislative activity in 1997 was partly a response to international commitments.2. 57 . 94 per cent of the FDI regulatory changes were in the direction of creating a more favourable environment for FDI (table III.3 During the period 19911997 as a whole. The majority of changes concerned the telecommunication and broadcasting industries. a three per cent increase in the former over the preceding year (table III.in the direction of less favourable conditions for FDI less incentives more control 1997 76 151 3 61 41 8 17 5 7 9 Source: a b c UNCTAD. a significant number of countries revised their intellectual property frameworks. able regulatory chang hanges. Tab le III.2). Including changes aimed at increasing control as well as reducing incentives. For example.Chapter III most countries have adopted frameworks designed to attract investors and create a favourable investment climate.2). Includes free-zone regulations. particularly in Africa. the unfavourable changes increased control or reduced incentives. Includes performance requirements as well as other operational measures. National regulator y c hang es and their distrib ution.3). 1997 Item Number of economies that introduced changes Number of changes . as well as increased incentives. continuing a trend that started in the 1980s. The favourable changes included liberalizing measures as well as new incentives. Including liberalizing changes or changes aimed at strengthening market functioning. 89 per cent were in the direction of creating more favourable conditions for FDI. following their commitments under the WTO Agreement on Trade-related Aspects of able regulatory chang hanges distribution. and 11 per cent in the opposite direction. National regulator y c hang es. Streamlining approval procedures was also an important feature of legislative reform. Includes changes applying across the board. 4 Liberalization moves in 1997 involved in particular the removal of operational conditions and the opening up of new industries to FDI (table III. This was the case in both developing and developed countries. type. Tab le III. sometimes through the revision of negative lists of industries previously closed to FDI.

J une 1998 Country Argentina Barbados Chile Colombia Costa Rica Cyprus Dominican Republic Ecuador Egypt India Indonesia Mexico Malaysia Nigeria Pakistan Peru Philippines Poland Romania South Africa Thailand Uganda Uruguay Venezuela Type of measure Local content and trade balancing Local content Local content and trade balancing Local content Local content and trade balancing Local content Local content Local content Trade balancing Trade balancing Local content Local content Local content “Dividend balancing” a Local content Local content and trade balancing Local content Local content Local content Local content Local content Local content and foreign exchange balancing Local content Local content Local content Local content Local content Local content Local content Local content Trade balancing Local content Sector Automotive industry Pork-processing industry Automotive industry Automotive industry Agriculture General Cheese and groundnuts General Pork General Automotive industry General Pharmaceutical products General Automotive industry. At the same time. particularly tax holidays. Indonesia withdrew the part of its notification that concerned measures in the automotive industry. Pursuant to commitments under the WTO Agreement on Trade-related Investment Measures (TRIMs). the amount of dividend that can be repatriated should be covered by the expor t earnings of the firm. Poland has informed the TRIMs Committee of the elimination of this measure as of January 1997. 58 . The entry into force of the Fourth Protocol of the General Agreement on Trade in Services (GATS) on Basic Telecommunications Services also led to the further removal of impediments to FDI entry in the telecommunication industry. 36 countries introduced new incentives or strengthened existing incentives (mostly fiscal).5 Investment promotion is an area in which government activity is particularly noticeable. such as setting up investment promotion agencies and facilities. certain types of performance requirements have also been notified to the WTO. while the adoption of the Fifth Protocol of GATS on Financial Services (see below) is expected to relax limitations on the presence of foreign suppliers of financial services. during a period of seven years after the start of commercial production.4. b utility boiler. i. In October 1996.4).Tr World Investment Report 1998: Trends and Determinants Intellectual Property (TRIPS). Measures notified under Ar tic le 5. Incentives are still on the rise.e. Measures other than incentives. fresh milk and soybean cake Automotive industry Automotive industry General General General Milk and milk products Automotive industry Certain chemicals Cash registers c General Automotive industry Telecommunication equipment Tea and coffee Various designated products General Automotive industry Automotive industry Source : a based on information provided by WTO. have also been taken to promote FDI. seven countries introduced measures to abolish incentives.1 of the TRIMs Agreement. The trend towards establishing able Artic ticle June Tab le III. the Madrid Protocol and the European Union’s Directives on Trademarks. During 1997. have been made more transparent (table III. b c The term “dividend balancing” used in India’s TRIMS notification describes a measure applied by India in 22 consumer goods industries which provides that.

At the regional. 1997. The number of countries that have signed BITs has increased from 165 in 1996 to 169 in 1997. The 18 countries shown. b y region.107 China . one thing they have in common is that representatives of civil society (box III. discussions or negotiations on the development of investment rules have proceeded in various forums.8. Its negotiating process is to be transparent and to take into account the differences in levels of development and size of the economies in the region in order to create opportunities for full participation by all countries. The United States also has 380 sub-zones in manufacturing plants. BITs concluded in 1997. Costa Rica .2). the countries of the region launched negotiations for a “Free Trade Agreement of the Americas” (FTAA) which is expected to be concluded by 2005. At the Second Summit of the Americas in Santiago de Chile on 19 April 1998. Of these. accounted for over 70 per cent of all zones worldwide. 1996 Region North America Asia Europe Africa Caribbean Central America Latin America Middle East Pacific Total Number of zones 320 225 81 47 43 41 41 39 2 839 Selected countries a United States .11 Turkey . Bulgaria .213.1) are increasingly paying attention to them (box III. the network of bilateral investment treaties (BITs) has expanded further. Developments at the international level At the bilateral level. with the total number of treaties having reached 1.5. b y between developing countries. plurilateral and multilateral levels. database on BITs. 249 were concluded by Figure III. Apart from BITs.1 608 Source : a WEPZA.11.2). scope and depth of these discussions and negotiations.26 Former Yugoslavia .4 Dominican Republic . adding to the substantial number of more than 800 such zones in existence in 102 countries (table III.7 Australia . Slovenia . Expor t pr ocessing zones and free zones. 2. In addition. and are discussed separately in the last section. In 1997 alone. Colombia .15.27 Honduras .14. The agreement is to be balanced.360 by the end of 1996).9 Brazil .513 by the end of 1997 (compared to 1. b Figures show the number of zones in a given country.6. 6 The negotiations on investment rules are to build on the efforts already initiated by 59 . able Export processing by Tab le III. In 1997. While there are considerable differences regarding the pace. close to 100 other countries host export processing zones or free zones. comprehensive and WTO-consistent and would constitute a single undertaking. Sudan . • Source : a UNCTAD.8 Kenya . bilateral treaties for the avoidance of double taxation have also become quite numerous. Jordan .9.Chapter III specialized schemes to attract foreign investors. Egypt . Indonesia . b Mexico .124. 27 per country group countr y gr oup a cent of the 153 treaties concluded that year were between developing countries (figure III. along with the United States. was strong in 1997: eight countries either formulated free zone regulations or established new free zones in that year. such as export processing zones and free-trade and investment zones.2.5).8. 153 BITs were concluded.

a). particularly international (but sometimes national) non-governmental organizations active in the fields of development.and represent -. In this sense. However. Some NGOs put more emphasis on lobbying via civil society from the very outset of their work on an issue.all in the /. the national legislative assembly (i.e. political and social goals. One area where there is a lack of definitional clarity is whether the private business sector should be included in the definition of civil society.. Until recently. some forums (including UNCTAD) have accepted that non-profit business associations and cooperatives could be treated as part of civil society. representative bodies of the enterprise and financial communities. should be treated differently. and perceived. Civil society is a “work in progress” which. cited in the United Nations Charter. should be treated as a separate category. civil society as a whole is made up of NGOs. communitybased and grass-roots organizations. democracy and human rights are to be realized. civil society has been defined. both are inextricably linked. women’s equality and human rights. 1996b). However. in whatever form the latter organizes itself.and aspiration-driven organizations of civil society usually reject the notion that they belong to the same category of organizations as private enterprises driven by the profit motive. However. professional guilds and a range of major social interest groups. but with a role that takes them beyond their social origins when they seek to influence state employment policies. the negotiations on the draft United Nations Code of Conduct on Transnational Corporations (UNCTAD. is as interest groups concerned with advancing their own agenda through the United Nations. in order to achieve wider economic. such as. NGOs are likely to remain a force to be dealt with in the foreseeable future.g. Certain NGOs have had a long involvement in at least some international economic debates and negotiations on which they have had an impact. all providing an interface between citizens and the state. reflecting the globalization of issues. the building of civil society can be seen as an objective whose achievement must be purposefully and actively sought. and thus also their members.. one useful way to regard both NGOs and the business community. While civil society can be seen as a counterbalance to the state. capacity and strength. Box III. the media. academic institutions. that is now changing rapidly and the civil society with which international organizations work is itself in the process of becoming globalized. 1996b). One indicator of their influence is the role they played with regard to the negotiations of the Multilateral Agreement on Investment (MAI) in the Organisation for Economic Co-operation and Development (OECD). at the heart of which is a shift in the relationship between the state and citizenry. disarmament. for example. It is also necessary to consider whether trade unions created within the private sector. consultation and sustainable development gained increasing acceptance in shaping international debate. only in the national context. Many NGOs pursue a step-by-step strategy. to define a relatively limited universe of non-state actors. trade unions. The final approach is to civil society generally at national and international levels.1.civil society and the private sector all over the world. is a socio-political reality whose continuing expansion demands active support if the goals of development. professional associations.Tr World Investment Report 1998: Trends and Determinants Box III. distinct from civil society. Source: UNCTAD (forthcoming. Non-profit. the United Nations has employed the term “NGO”. e. The first is to approach a relevant domestic ministry. The reverse is also the case. while existing throughout much of the world in different shapes and forms. Should this fail. as the legislative branch of government. the parliament) may be approached. However. an absolute definition that excludes business from civil society is perhaps not very helpful. the Guidelines on Consumer Protection (UNCTAD. and the Rio Earth Summit and the GATT/WTO -. Given the sheer diversity of the institutions that comprise -. at different levels of organization. the environmental ministry of a member of the European Union. NGOs and international rules on investment The late 1990s might come to be remembered as the time when non-governmental organizations (NGOs) first became a force in international economic policy-making and when the principles of participation. 2. A case can also be made that national parliaments. Traditionally. value. Defining civil society The idea of “civil society” seeks to capture the way in which the world appears to be changing politically. 60 .

If broad consensus is to be achieved. the focus of many NGOs already working on trade. Some environmental NGOs took the position that a change was needed in the GATT/WTO rules to make them more “environmentally friendly”.now World Trade Organization -.dispute panel (Lindert and Pugel. coordinate their efforts and connect with a global audience. The issue is relevant because.was effectively 'expropriation' since it reduced the value of the company's assets. 30 March 1998. some NGOs opposed NAFTA whereas others sought to modify it to take environmental and labour issues into account. enforced a provision of the Mammals Protection Act (1972) relating to the high mortality rate of dolphins when tuna were caught with purse-seine nets. Indeed. “some think it could fundamentally alter the way in which international economic agreements are negotiated”. in the draft language of the MAI. there would be major legal repercussions in the area of the environment and public health and safety. If it were so. These organizations are likely to continue to play a role in such negotiations. NGOs feared that. NGOs are concerned that much environmental law and regulation might be undone if governments grow fearful of endless and costly lawsuits by foreign investors under the MAI. at the request of the Earth Island Institute in California. it is thus essential that international investment discussions and negotiations involve all those potentially affected. In the subsequent debates over the North American Free Trade Agreement (NAFTA) in 1995. 61 .a petrol additive produced by Ethyl that is allegedly considered to have an adverse effect on the operation of vehicle pollution control components -. 1996). it appeared to some that a regulatory taking affecting a foreign investor might qualify as an expropriation and hence be subject to compensation. where the MAI was under negotiation. which devoted much attention to the need for governments to engage in a discussion with “interested groups in their societies” over the process of globalization and the implications of the MAI. In late 1996. the ongoing debate is a clear reminder that FDI issues. and the general situation flagged by the NGOs. raise complex questions of national policy in both developed and developing countries. the assets of a private party lose value. some dolphins were caught and drowned in the purse-seine nets. This decision upset environmentalists worldwide and suggested to many of them that the multilateral trade rules were indifferent if not inimical to environmental concerns.2. The GATT panel found that the United States decision was inconsistent with GATT rules. This is the logical consequence of the internationalization of the domestic policy agenda. Mexico disputed this decision and brought the United States to a General Agreement on Tariffs and Trade (GATT) -. Concerns of NGOs in this domain have been exacerbated by a suit brought against the Government of Canada by the United States Ethyl Corporation under provisions of the NAFTA that are similar to the proposed MAI provisions. a The involvement of NGOs in international economic negotiations can be traced to at least 1988 when the United States. investment and development issues shifted in part to the OECD. falls under the rubric of a “regulatory taking”: a situation where. since tuna swim below dolphins. The importance of new technological tools and the increasing organization and sophistication of NGOs cannot be understimated. 1998a). whether at the OECD or in some other forums. The case in Canada. In brief. a “Network guerillas” . according to a commentator. In more recent years. were the Government of Canada to lose this suit. Perhaps the main contribution of recent NGO campaigns has been in moving the debate on international investment rules away from narrow technical issues and towards a wide-ranging discussion of regulation and globalization. with up-to-the-minute material. by virtue of the implementation of a law or regulation by a government. NGOs have established themselves as a force to be reckoned with in discussions and negotiations over international rules on investment. which by their very nature touch on the entire range of matters relating to production and the production process. Ethyl claimed that the decision by the Government of Canada to ban the import and transport of MMT -. Financial Times . others felt that the whole system needed to be reviewed. including an audience in developing countries. the investor-state disputesettlement procedure could well decide in a given case that a regulatory taking constituted an expropriation. This shift was emphasized in the OECD Ministerial Statement (OECD. the availability of such a facility as the Internet has greatly enhanced the capacity of NGOs to share information.Chapter III (Box III. concluded) late 1980s and early 1990s. Source: Graham. 1998.

On the basis of these inventories. FTAA Box III.” 8 Furthermore. it was agreed that the Negotiating Group on Investment “should develop a framework incorporating comprehensive rights and obligations on investment. the Group found that practically all countries of the American continent offered constitutional protection to the basic principles of private property. Preparing for negotiations on investment rules in the FTAA The Working Group on Investment met between September 1995 and March 1998. one of the existing investment agreements within the region and the other of the national investment regimes in the continent. /.in particular business. freedom of enterprise.Tr World Investment Report 1998: Trends and Determinants the FTAA Working Group on Investment (box III. the four members of MERCOSUR and Canada signed a “Trade and Investment Cooperation Arrangement” aimed at enhancing economic relations between the parties. without creating obstacles to investments from outside the hemisphere. as well as a description of inward and outward investment flows in the region. his investment and related flows.3. The arrangement also establishes a council of business representatives from the member countries to advise the parties on areas of particular concern to the private sector. the Working Group was to prepare for the negotiations on a future investment chapter of the FTAA by promoting an exchange of ideas among countries on the regulatory alternatives available to them. cooperation on customs matters. In June 1998. the San Jose Declaration recognizes and welcomes the interests and concerns that different sectors of society have expressed in relation to the FTAA -. The arrangement establishes a plan of action which foresees a framework for negotiating bilateral investment agreements. it establishes a committee of government representatives to receive inputs from civil society groups and present a range of views for the consideration of ministers. To that end. and the identification of measures distorting or hindering trade and investment. taking into account the areas already identified by the FTAA Working Group on Investment and develop a methodology to consider potential reservations and exceptions to the negotiations. 62 . the Group was then to identify the areas of convergence and divergence in the national and international frameworks.”7 A Negotiating Group on Investment was established for this purpose. • Also on the American continent.and encourages these and other sectors of civil societies to present their views on the topics under negotiation in a constructive manner. in particular in the areas of trade and investment. The Group was asked to begin by developing two inventories. during the first meeting of the FTAA Negotiations Committee.3) and “aim to establish a fair and transparent normative framework to promote investment through the creation of a stable and predictable environment to protect the investor. It had two objectives: • To present to the governments of the region a precise and clear assessment of the existing normative frameworks applicable to foreign investment in the American continent. As for convergence. environmental and academic groups -.. labour. this plan of action provides for cooperation in the WTO and other appropriate forums on issues of common interest as well as consultations on the negotiation and implementation of the FTAA. on 17 June 1998. • On the basis of such an assessment and description.. Furthermore.

to focus the negotiations only on the question of scope and coverage. tax treaties and bilateral concessionary finance schemes). conferences and workshops. the chapter on investment would be divided into three areas: definitions. and stimulate investment opportunities while avoiding unjustifiable obstacles to extra-hemispheric investment. admission of managerial personnel. national treatment. without prejudice to exceptions in cases of serious balance-of-payments problems. 63 . the processes of authorization and registration of foreign investment. and the industries that are open to foreign investment. economic integration schemes. include.3 (concluded) equality between foreigners and nationals. it recommended the following: • With respect to the objectives of the negotiations the Group recommended that these should aim negotiations. compensation for losses due to armed conflicts. not only with respect to disputes between the parties but also with respect to disputes between investors and host countries. there is also a great similarity between the agreements with respect to settlement of disputes. transfers of funds. • On possible approaches to the negotiations two options were discussed. as well as in the criteria for determining the nationality of juridical persons. expropriation and compensation. comprehensive and balanced normative framework. in so far as some agreements grant national and most-favoured-nation treatment only to investments already established in accordance with national legislation. Free Trade Area of the Americas. while others grant such treatment at the pre-establishment phase. most-favourednation treatment and fair and equitable treatment. at establishing a fair and transparent legal framework conducive to a stable and predictable investment climate to protect investors. most-favoured-nation and sectoral reservations. fair and equitable treatment. and to continue the interaction with the private sector through seminars. All investment agreements between countries in the region are based on the principles of national treatment and most-favoured-nation treatment. There is convergence regarding the justification of an expropriation decree and the criteria used to determine the amount of compensation. other relevant issues may be agreed upon): basic definitions. including the existence of a national authority specifically responsible for these matters (different powers being held by sub-national authorities in different countries). and due process of law. the principles of non-discrimination. The first option was the negotiations. President. general exceptions and settlement of disputes. Source : Anabel Gonzalez. Finally. allowing for clearly defined reservations and exceptions on them. national treatment and sectoral reservations. Negotiating Group on Investment. performance requirements. during the negotiations. to continue discussions on specific issues on which there is already convergence at the national level. the scope of the application of national treatment and most-favourednation treatment. More specifically.Chapter III Box III. In addition. scope of application. and many include basically the same exceptions to most-favoured-nation treatment (i. With respect to its second objective. the means of payment and the due process guarantees to be followed. Most national regimes and investment agreements are committed to allowing transfers of capital related to an investment in a freely convertible currency and at the exchange rate prevailing on the day of the transaction. The main areas of divergence were found to lie in the definition and scope of the concept of foreign investment. general exceptions and specific reservations to the general obligations. in order to establish a transparent. the Group identified various perspectives and options for dealing with key substantive elements of an investment agreement. To achieve this. and many of the countries of the FTAA are members of ICSID or are in the process of adhering to it. • Regarding the substance of the negotiations the Group recommended that the negotiation should negotiations. The second option was to engage in three activities: to expand and deepen the statistical study on investment flows in the Hemisphere with a view to arriving at the harmonization of national statistical systems. mechanisms for the settlement of investment disputes. principles and obligations of general application.e. the Group identified 12 substantive issues that will be subject to negotiation (without prejudice to the possibility that. at a minimum. negotiation of a chapter on investment that would establish obligations of general application. their investments and related flows.

The thrust of the work being carried out. strategies and practices. while avoiding legally binding commitments and dispute settlement mechanisms.OECD. forthcoming). for example. which is expected to be signed later in 1998. They also stressed their commitment to a transparent negotiating process and to active public discussions on the issues at stake. Since then. that it needed to be consistent with the sovereign responsibility of governments to pursue domestic policies.9 after the text of the draft agreement was made public through the Internet (www. members decided to enhance ASEAN’s FDI attractiveness. Ministers recognized in particular that. for now. among others. the ASEAN Investment Area proceeds mainly through an approximation of objectives. Thus. simplification of investment procedures and enhancement of transparency in investment policies.4). in order to deal with outstanding difficulties (OECD. including the European Parliament. the MAI has attracted wide attention.htm). These various activities are to be consolidated in a framework agreement on the ASEAN Investment Area. the latter including the right of countries and communities to manage their own development. social and cultural sensitivities.org/ daf/cmis/mai/maindex. The investment initiative being discussed in ASEAN. while emphasizing policy flexibility and informal consultations to resolve difficulties (Bora. joint training programmes for investment officials. the ministers decided to allow for a period of assessment and consultations. This was all the more important. consultations and exchange of information and experiences among ASEAN investment agencies on a regular basis. They have stressed the need to ensure that key MAI provisions on. The overarching concern of NGOs is that the rights bestowed upon foreign investors by the MAI be balanced by a requirement to meet environmental and social responsibilities. they argued. initiated in 1995. as described in the ASEAN Plan of Action on Cooperation and Promotion of Foreign Direct Investment and Intra-ASEAN Investment. not only among NGOs but also in a number of parliaments. It would be based on three pillars: cooperation and facilitation.Tr World Investment Report 1998: Trends and Determinants • At the ASEAN Bangkok Summit Meeting in 1995. general treatment and expropriation cannot be construed to undermine the regulatory powers of government. while the agreement needed to ensure a high standard of liberalization. and needed to address environmental and labour issues. Work has continued in the OECD with regard to the negotiations on a Multilateral Agreement on Investment (MAI). differs from the rule-oriented approach adopted in other regional integration frameworks by being designed to encourage investment through voluntary cooperation amongst members. 1998a). promotion and awareness. it also needed to take into account economic concerns and political. and other measures to promote greater intra-ASEAN investment by facilitating the effective exploration of the region’s comparative and complementary locational advantages. involves cooperation on programmes for the promotion of FDI and intra-ASEAN investment. At the April 1998 ministerial meeting. and liberalization programmes. creation of an Investment Unit within the ASEAN Secretariat. A number of non-OECD member countries were welcomed to participate as observers (box III. in the light of the special treatment given to foreign • 64 . One of the high points in the recent MAI negotiations was the meeting of the MAI Negotiating Group with non-governmental organizations (NGOs) in October 1997.

and effective dispute-settlement procedures. The negotiations had begun formally in 1995. 1996). negotiators had been under increasing pressure from nongovernmental organizations and others to increase transparency and seek broad-based political support. • The MAI is meant to be a free-standing international treaty open to all OECD members and the European Community and to accession by non-members willing and able to meet its obligations. • Transfer of funds: investment-related payments (including capital. the negotiations on a Multilateral Agreement on Investment (MAI) in the OECD reached a critical stage.. Eight non-members currently participate as observers.Chapter III Box III. Engering. Between September 1995 and early 1997. Investors would not be able to challenge domestic regulations as de facto expropriation. The OECD Multilateral Agreement on Investment: state of play as of July 1998 In April 1998. to last until October 1998. 1995. 65 . There is broad support for including a strong commitment by governments not to lower environmental or labour standards in order to attract or retain investment. • Country-specific exceptions would be an integral part of the agreement. the protection of investment. Negotiators are aiming for a set of disciplines and exceptions that would achieve a high standard of liberalization and a satisfactory balance of commitments. a In addition. The MAI would not inhibit the normal non-discriminatory exercise of regulatory powers by governments. real estate. Partly as a result of these pressures. • National treatment: foreign investors and investments to be treated no less favourably than domestic investors and investments. • There is increased convergence of views on the need for the MAI to address environmental and labour issues. main features and main outstanding issues as they have emerged from the negotiation process and the draft agreement so far: The MAI is intended to provide a broad multilateral framework for international investment with high standards for the liberalization of investment regimes. Basic principles • The MAI addresses investors and investments. social and cultural sensitivities. taking full account of economic concerns and political. In reviewing proposals for adherence to the MAI. Main features Core MAI rules : • Transparency : publication of laws and regulations affecting investments. Between early 1997 and the OECD ministerial meeting of April 1998. The following paragraphs describe the objectives.. It seeks to provide predictability and security for international investors and their investments. Furthermore. operation and sale. portfolio investments. profits and dividends) must be freely permitted to go to and from the host country. /. • Most-favoured-nation treatment: investors and investments from one MAI party to be treated no less favourably than those from another MAI party. the parties would give full consideration to the particular circumstances of each country. including country-specific exceptions to accommodate the applicant’s development interests. and rising living standards for both developed and developing countries (Witherell. other financial instruments and intangible assets. basic principles. and MAI disciplines would not apply where specific exceptions had been agreed to. with business and labour. Investment will be defined broadly to include enterprises. a pause for reflection was agreed to by the ministers. there is an ongoing dialogue with non-member countries. and with non-governmental organizations. sustainable development and employment. expansion. the negotiating process was mostly of a technical nature. and thus promote economic growth and efficiency. the MAI seeks to be consistent with the sovereign responsibility of governments to pursue their policy objectives.4. including their establishment.

• Conflicting jurisdictions: this issue arose because of the adoption in one country of two laws that would directly affect investors from third countries. Main outstanding issues • Liberalization and exceptions: proposed exceptions to most-favoured-nation treatment for regional integration schemes (REIO clause). Estonia. Brazil.would be annexed to the MAI without changing their status as non-binding recommendations.Tr World Investment Report 1998: Trends and Determinants (Box III. Exceptions to MAI rules: • General exceptions : any country would be able to take measures necessary to protect its national security or to ensure the integrity and stability of its financial system. • Labour standards: whether there should be a provision prohibiting lowering labour standards to attract or retain an investment.a code of good business conduct setting out OECD members’ expectations behaviour and activities of TNCs -. cultural exceptions. China. they will permit each country to maintain non-conforming laws and regulations. is consistent with multilateral environmental agreements. The OECD Guidelines on Multinational Enterprises -. a Argentina. both foreign and domestic. • Temporary safeguards: provisions to enable countries to take measures necessary to respond to a balance-of-payments crisis. nor require member countries to adopt a uniform set of investment regulations. and does not prevent the parties from setting national environmental standards for investment. a binding provision on non-lowering of standards on health. In March 1998. A tentative agreement reached on this issue in May 1998 between the United States and the European Union appears to contain elements for possible inclusion in the MAI. and • require parties to accept each others’ product or service quality or safety standards. a qualification on national treatment. such as minimum export targets for goods and services.4. flexible regime of standstill on new non-confirming measures. and the Slovak Republic. the Chairperson of the Negotiating Group put forward a package proposal which included the following elements: language for the preamble. adequate and effective compensation. • Environmental protection: the objective is to ensure that the MAI does not stimulate “pollution havens”. environment and labour measures. Source : OECD materials. with prompt. if necessary. 66 . Furthermore. • Dispute settlement: provision for resolving disputes through consultations. Lithuania. local content rules or technology transfer requirements. • Expropriation: may only be undertaken for a public purpose. safety. • Country-specific exceptions: negotiated among MAI parties. an interpretative note regarding the articles dealing with general treatment and expropriation aimed at making clear that the MAI would not inhibit the exercise of normal regulatory powers of government (particularly in the area of environment). • prevent parties from providing funds for domestic policy purposes. the MAI would not: • mandate detailed domestic measures affecting investment. to binding arbitration of disputes between states and between foreign investors and host states. Chile. current lists of reservations to the MAI. with recourse. and a cross-reference to the OECD Guidelines on Multinational Enterprises. Latvia. Hong Kong. whether the MAI should explicitly support internationally recognized core labour standards. concluded) • Performance requirements: targeted prohibitions on certain requirements imposed on investors.

international conventions on intellectual property and regional agreements (REIO) have still not been clarified. Consumer Unity and Trust Society (CUTS) and the Council of Canadians (CoC) have prepared alternative texts to those in the MAI draft (CoC. on a global scale. guaranteeing the latter full rights and protection while the signatory states are taking on burdensome obligations which might leave their populations unprotected. some NGOs (e. 1998. and its relationship with international environmental agreements (MEA).. the MAI is unbalanced with respect to the rights and obligations of foreign investors and that adding nonbinding guidelines for the behaviour of foreign enterprises to the MAI’s legally binding provisions on investment protection would not be sufficient to rectify the balance. 5). sustainable economic growth. but should also contribute to responsible development of the country of establishment by promoting technology. the European Parliament and the Council. healthy social relations and protection of the environment. I. 5.10 Parliament’s Box III. F. whereas the EU has not yet supplied any studies on the impact of the MAI on trade. relations with the ACP countries and the EU’s development policy.. D. a .g. with even national parliaments being excluded. regretting the fact that the negotiations have hitherto been conducted in the utmost secrecy. NGOs believe that. 1. 67 . G. employment. /. Resolution containing Parliament’s recommendations to the Commission on negotiations in the framework of the OECD on a multilateral agreement on investment (MAI) (Excerpts) The European Parliament having regard to its resolution of 14 December 1995 on the Commission communication entitled ‘A level playing field for direct investment worldwide’. environmentally and socially sustainable and regionally balanced economic development. social and cultural legislation and legislation on intellectual property rights in the EU.. Finally. H. although transparency and parliamentary supervision in key international economic issues are of crucial importance for the legitimacy of relevant international agreements. In fact. Many of these and other concerns were also shared by the European Parliament in a “Resolution containing Parliament’s recommendations to the Commission on negotiations in the framework of the OECD on a multilateral agreement on investment (MAI)” (box III.. whereas the MAI must not only provide benefits to the industry and the countries of origin. Emphasizes the need for a broader public debate and ongoing parliamentary monitoring of the negotiations being conducted within the framework of the OECD. commerce and the labor market or intellectual property and whereas the compatibility of the MAI with existing environmental. puts to the Commission the following recommendations: E. CUTS..Chapter III investors through the investor-state dispute-settlement provisions which would allow these issues to be decided by international expert tribunals. as it stands. 1998). Some special interest groups such as authors and film-makers called attention to the threat that the MAI could pose for preserving cultural identity. whereas the aim of an MAI should be to prevent ruinous competition between investors which would be harmful to the populations concerned in order to foster. concerned that the draft multilateral agreement on investment (MAI) reflects an imbalance between the rights and obligations of investors. The NGOs also called for the MAI to include provisions on labour rights and consumer and environmental standards in order to ensure that the removal of barriers to FDI did not lead to a lowering of standards in these areas. bearing in mind that the decisions to conclude an agreement are a matter for the state and national parliaments.

as well as the WTO. particularly in the field of social and environmental legislation. such as the Rio Declaration. culture and intellectual property. /. structural and cultural policies of the EU and its Member States. 11. Calls on the Commission. 13. investigating to what extent the draft MAI is in conflict with: (a) relevant international agreements. the WTO’s consideration of this question must take full account of the results of the UN conferences. such as the undertaking to integrate economic. so that the interests of the developing countries and their national policies are taken into account as well as the interests of investors. therefore. as laid down in the OECD Code of Conduct of 1992. 12.. Notes that non-OECD member states. 14... Calls on the Commission. within a reasonable period. 3. and fears that EU Member States may come under pressure in these areas in the next few years. national and EU legislation designed to promote sustainable development.. continued) 2.. and calls on the states involved in concluding the MAI to refrain from exerting any pressure on the developing countries in order to induce them to accede to it. 5. agreements on the responsibilities of multinational enterprises. 68 .. should be respected. in formulating prohibitions of specific performance requirements. but regards the fact that those countries may not themselves exert any influence on the content of the agreement as a major shortcoming of the MAI. . to carry out an independent and thorough impact assessment in the social. which is now accepted both by the OECD and by the G8 as the basic characteristic of relations between developed and developing countries. social and environmental policy (May 1997).Tr World Investment Report 1998: Trends and Determinants (Box III. the UNCTAD Set of Multilaterally Agreed Principles for the Control of Restrictive Business Practices(1981) and the HABITAT Global Plan of Action and international commitments already entered into by the OECD. and hence developing countries in particular. Calls for the question of investment protection to be examined in a multilateral context in which all the developing countries are involved. would be the appropriate forum for these negotiations. environmental and development fields. (b) previously agreed OECD guidelines. to ensure that the latter do not conflict with the environmental social. . so that UNCTAD. may also accede to the agreement under negotiation. Insists further that reference should be made to compliance with international human rights conventions and environmental and social standards not only in the preamble of the MAI and that the MAI should contain unequivocal provisions which prevent a lowering of existing environmental and social standards by the MAI and make possible the introduction of new standards.5. 6. Considers it necessary for a derogation to be made for balance-of-payments disequilibria coupled with a provision to deter parties from abusively invoking balance-of-payments problems. Stresses that it is essential that the principle of partnership. (c) regional. Agenda 21.. and OECD policy on development cooperation as formulated in ‘Shaping the 21st century: the contribution of development cooperation’ (1997). Is concerned that the performance requirements might curtail the right of States to implement existing industrial policies and to develop any new ones as required in future. the UN Guidelines on Consumer Protection (1985). particularly with regard to the environmental and social dimensions.

p. including foreign investment.any act of (Box III.. labor. The Convention in particular prohibits -. 37. VI. The Convention seeks to establish high standards for national and international measures to combat bribery by public officials in international business transactions.g. environmental legislation.. a Calls on the parliaments and governments of the Member States not to accept the MAI as it Official Journal of the European Commission. pursuant to the procedure provided for in Article 228(6) of the EC Treaty.. the governments and parliaments of the Member States and the Secretariat of the OECD.. e.. 69 . takes the view that governments must make sure that they cannot be condemned to making compensatory payments if they establish standards on the environment.... 1996). IV. .. human rights and social matters.subject to the constitutions and fundamental principles of the legal systems of the states parties -.. Instructs its President to forward this resolution to the Council... .. to be too far-reaching. . 21 Calls for the invoking of national security interests to be made subject to objective criteria which are verifiable under the disputes settlement procedure... 11 Another plurilateral instrument addressing this problem is the Inter-American Convention against Corruption which was opened for signature in March 1996 (OAS. insists.Chapter III • In 1997. the OECD adopted the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (OECD.. . adopted within the framework of such an organization and replacing the measures previously applied by these States. the Council and the Member States to submit. 1997a). therefore.. 18. the definitive draft of the MAI to the Court of Justice for full examination.. Source : European Parliament. Calls on the Commission. thus avoiding the distortions that bribes can introduce in the international flow of investment. and in particular on expropriation. . health and safety. 1998. the Commission. Considers the proposed provisions on investment protection. but advocates that those guidelines should constitute a compulsory component of the MAI and calls in any case in this connection on the governments of the Member States to encourage international enterprises to draw up their own codes of conduct comprising provisions in the field of environmental protection. EU legislation and preventing further harmonization of EU legislation.. 175. compensation and the transfer of capital and profits. . concluded) 15.5. stands: .. 23. 22 January 1996. Welcomes the inclusion of the OECD guidelines for multinational undertakings as a an annex to the MAI. on the insertion of a separate part of a Regional Economic Integration Organization (REIO) clause permitting new harmonized measures. takes the view that countries belonging to REIOs are not obliged to extend to countries not belonging to the organization concerned the more favourable treatment reserved for member countries. in this connection also advocates the inclusion of an anti-abuse clause.

limitations on the juridical form of commercial presence (branches.ORG). It entered into force on 5 February 1998. a large part of commitments on financial services concern commercial presence. In fact. The results were attached to the Fifth Protocol to the GATS on Financial Services (WTO. which typically involves all forms of FDI entry. agencies. transparency and the involvement of civil society).Tr World Investment Report 1998: Trends and Determinants bribery involving international economic transactions. see UNCTAD 1997a. The Supplementary Treaty. representative offices. and aims at fostering the progressive development and hamonization of domestic laws in this area. At the multilateral level. 1996b. The new commitments relate. including market access through commercial presence.ENCHARTER. however. As regards investment.) and limitations on the expansion of existing operations. as in other service industries. seeks to strengthen intergovernmental cooperation.ENCHARTER. its investment provisions contained only a best-endeavour commitment with respect to nondiscrimination and provided that the Supplementary Treaty would deal with the conditions for a legally binding non-discrimination obligation for the preinvestment phase. Among other things. by the end of June 1998. The text also provides an option for listed countries to reserve all or some of the state’s shares or assets that are being privatized to its own nationals. listing each nonconforming measure in an annex to the treaty. the Fourth Protocol to the General Agreement on Trade in Services (GATS) on Basic Telecommunications Services was concluded in 1997 in the framework of the WTO. it grandfathers existing restrictions. the Energy Charter Treaty contains an obligation to accord non-discriminatory post-investment treatment without exceptions. the Energy Charter Treaty (UNCTAD. suggests a number of preventive measures (including measures aimed at promoting accountability. Commitments were made in all of the three major financial service sectors -- • • 70 . In this context. vol. etc. provides for two types of exceptions from the non-discrimination principle. I) entered into force on 16 April 1998 and. Moreover. to the elimination or relaxation of limitations on foreign ownership and control of local financial institutions (particularly through increase of foreign equity to more than 50 per cent). it contains commitments to open market access for FDI entry in telecommunication service industries (WTO 1997a. among other things. box V.ORG). 1997b) which is expected to enter into force by March 1999. non-discrimination means the better of two standards: MFN treatment and national treatment. The WTO negotiations of schedules on financial services were concluded on 12 December 1997. For the pre-investment phase. Some commitments involve “grandfathering” of existing branches and subsidiaries of foreign financial institutions that are wholly owned or majority-owned by foreigners. 38 countries had ratified it (www. These negotiations led to new and expanded commitments on the liberalization of market access for financial services. • In Europe. as negotiated. subsidiaries.18 for a summary description). these exceptions are set out by each country. First. the negotiations on a Supplementary Treaty regarding investment and an amendment to the Energy Charter Treaty’s trade provisions were concluded in December 1997 (www.

These cover four broad areas: implications of the relationship between trade and investment for development and economic growth. and some countries have also chosen to schedule measures that may be characterized as prudential measures but could be challenged as limitations on market access or national treatment in the future. plurilateral or multilateral level (box III. * * * An attempt to assess the above processes at this stage would of course be premature. given the close interrelations between financial services and macroeconomic policy. Their main purpose is to help developing countries participate as effectively as possible in international discussions and negotiations on FDI in which they choose to participate. such services were provided with a prudential carve-out in the GATS Annex on Financial Services. Indeed.with the active participation of principal groups in civil society -. with potential effects on all other economic activities. With five countries making commitments in financial services for the first time. In the light of these.8). helping to identify the interests of developing countries.is paying special attention to issues related to the development friendliness of international investment agreements (box III.6). But the outcomes of some of the discussions permit at least a few preliminary observations: 71 . including overlaps. UNCTAD. securities and insurance -. exploring the range of issues that need to be considered. • Work has also proceeded in the WTO Working Group on the Relationship between Trade and Investment on the basis of a list of issues that were identified for examination and discussion. regional. governments have traditionally assumed a major role. the work programme concentrates on deepening the understanding of the issues involved in international investment instruments. possible conflicts and gaps in existing international instruments (box III. and with a view to consensus-building.as well as in other services such as asset management and the provision and transfer of financial information. Commitments in insurance were increased in number and depth. both as providers and as regulators of financial services. is pursuing a number of activities relating to international investment agreements. the total number of WTO members with commitments in financial services will increase to 102 upon the entry into force of the Fifth Protocol. in accordance with its mandate.7). In this context. UNCTAD -.Chapter III banking. and ensuring that the development dimension is understood and adequately addressed. and the identification of common features and differences between the two areas. Finally. stocktaking and analysis of existing international instruments and activities regarding trade and investment. These commitments may be particularly important for some developing countries which have only recently started to adopt market reforms in financial services. More countries made commitments in banking than in securities. More specifically. the economic relationship between trade and investment. be it at the bilateral. and the strategic role of services industries in influencing the allocation of financial resources and ultimately in attaining development objectives. financial services have unique characteristics: financial stability and investor protection are crucial policy objectives in all countries.

• • • Given the breadth of the mandate. 72 .Tr World Investment Report 1998: Trends and Determinants Working Trade Box III. the advantages of entering into different types of investment agreements. It covers inter alia the determinants of FDI. However. 1997c). future negotiations. and the implications for trade and investment flows of existing international instruments. The WTO Working Group on the Relationship between Trade and Investment The General Agreement on Tariffs and Trade (GATT) was concerned with measures affecting cross-border trade in goods. held in Singapore in December 1996.. The list covers both economic and normative issues and reflects the varying interests of the members of the WTO as well as the complex nature of FDI: Item I concerns the implications of the relationship between trade and investment for development and economic growth. The Singapore Ministerial Declaration requires the Group to examine the relationship between trade and investment. and the rights and obligations of home and host countries and of investors. In recent years. Among the specific areas suggested for study are the examination of issues such as the effects of investment on transfer of technology. the WTO General Council will determine after two years how the work should proceed. bilateral. if any. the effects of trade policies and trade agreements on investment flows.. regarding multilateral disciplines will take place only after an explicit consensus decision is taken among WTO members regarding such negotiations. Item II deals with the economic relationship between trade and investment. a detailed work programme was adopted at the first meeting of the Working Group in June 1997. not only have FDI flows continued to increase but the pattern of these flows has changed considerably. in the form of a “Checklist of issues suggested for study” (“the list”) (WTO. balance-ofpayments equilibrium. plurilateral and multilateral investment agreements other than those covered by the WTO. These and similar factors led to the establishment of the WTO Working Group on the Relationship between Trade and Investment at the first WTO Ministerial Conference. These developments have been supported by the liberalization of national investment laws and the proliferation of bilateral and regional investment agreements which in turn have facilitated complementary links between trade and investment. while stating inter alia that: • • the work in this Group shall not prejudge whether or not negotiations will be initiated in the future. is concerned with the treatment of foreign enterprises and natural persons as well. as the proportion of FDI flowing to developing countries has increased rapidly. the treatment of foreign investment in the WTO Agreements is rather fragmented and limited in comparison with other existing international investment arrangements. employment creation and competition. regional. The World Trade Organization (WTO). Item III concerns existing international arrangements and initiatives on trade and investment. and the Working Group on the Relationship between Trade and Investment and the Working Group on the Interrelations between Trade and Competition should draw on each other ’s work. It includes a stocktaking and analysis of existing WTO provisions on investment-related matters. and the effects of investment policies on trade flows. its successor organization.6. the Group shall cooperate with UNCTAD and other appropriate international fora to make the best use of available resources and to ensure that the development dimension is taken fully into account. The creation of the Working Group reflects a compromise between various views. Item IV deals with issues that are relevant to assessing the need for possible future initiatives and includes the identification of common elements and differences in existing international instruments in the area of investment. /.

Issue papers. which took place in December 1997.g. two expert meetings of the Commission had been held. was a high-level discussion. society. UNCTAD’s work on a possible multilateral framework on investment To give effect to the mandate received from UNCTAD IX which called upon UNCTAD to identify and analyse implications for development of issues relevant to a possible multilateral framework on investment (MFI) (UNCTAD. the second in June 1998.7.6 (concluded) At meetings of the Working Group held in October and December 1997. the second for Asia took place in July 1998. national treatment. in March and June 1998. The main purpose of this series of over 20 papers is to address key concepts and issues relevant to international investment instruments. Geneva-based seminars. further symposia are scheduled to take place during 1998 in Latin America and the Caribbean. took place with a group of NGOs in June 1998. including the Trade and Development Board. UNCTAD has developed a work programme which comprises: • Substantive support to the intergovernmental process. Source : UNCTAD. 1998e. Regional symposia. between Geneva-based ambassadors and European business leaders. these are meant to facilitate informal discussions among delegates in Geneva on economic and regulatory investment issues. transfer of technology and restrictive business practices). and its expert meetings on MFI-related issues. a similar event. Training activities on FDI for capacity-building purposes. Morocco. Source : UNCTAD. particularly from a development perspective. The first such seminar took place in February 1998. Further training activities on FDI will consist of training courses for junior diplomats and a master class for negotiators. Dialogues with civil society. The Group will probably submit a report to the General Council at the end of 1998. Undertaken jointly with the WTO. the Commission on Investment. on the basis of which the General Council will decide how the work should proceed. co-sponsored by UNCTAD and the European Roundtable of Industrialists. By mid-1998. Particular attention is given to the way in which the key topics have been addressed in international investment agreements so far and what their development implications are. Symposia for policymakers in capitals aim at facilitating a better understanding of key issues related to international investment agreements. Preparation of a series of issue papers addressing key topics related to international investment agreements (on such issues as e. The first event of this kind. the Group discussed the first three items on this checklist and. Technology and other Financial Flows. in New Delhi. and a third event is planned for the Autumn of 1998 with trade union representatives. and to present them in a manner that is useful to policymakers and negotiators. UNCTAD’ AD’s Box III.Chapter III Box III. right of establishment. The secretariat has invited interested groups from civil society to participate actively in a dialogue with relevant policymakers involved in international investment agreements. based on WTO materials. dealing with existing agreements on investment and their development dimensions: the first meeting (28-30 May 1997) focused on bilateral investment treaties and the second (1-3 April 1998) on regional and multilateral investment agreements. as well as the WTO Working Group on the Relationship between Trade and Investment (where UNCTAD has observer status). The first regional symposium for Africa took place in Fèz. in June 1997. co-sponsored with NGOs. A seminar was also organized jointly with the Consumer Unity and Trust Society (CUTS) and the Rajiv Gandhi Institute in New Delhi in July 1998. • • • • • 73 . Further meetings of the Working Group are scheduled to take place in October and November 1998. It also began discussions on the fourth item. 1996c). identified a number of specific subjects that require further study.

for instance. since they touch. contents and implementation of international investment agreements (box III.which includes adopting less restrictive national laws. 1993a. if broad consensus is to be achieved. The role and characteristics of double taxation treaties Reduced obstacles to FDI and the possibilities that they open up for firms to disperse production activities within integrated international production systems create new challenges for tax authorities. in one way or another. concluding BITs and pursuing regional agreements and multilateral discussions on FDI issues -.8). 201-210). any agreement involving developing countries must incorporate the special dimension of development policies and objectives. This section focuses on double taxation treaties. In particular. are difficult to negotiate.has also been accompanied by increasing resort to bilateral treaties for the avoidance of double taxation. p. This applies particularly to developing countries and. both home and host countries 74 . For international investment agreements to be effective and stable. they need to take into account the interest of all parties. Double taxation treaties The evolution of investment regulations -. to agreements between countries at different levels of development. on the entire range of questions relating to production and the production process and therefore involve complex issues of national policy in both developed and developing countries. all those potentially affected. more generally. 3). by their very nature. • • • B. including representatives of civil society who have a real stake in the outcome of these processes. to incorporate a balance of interests and to allow for mutual advantage. it is important that international discussions and negotiations associate. 1. A more procedural lesson that emerges is that. As discussions and negotiations on FDI advance at various levels.Tr World Investment Report 1998: Trends and Determinants • Whatever the fate of these various initiatives. it is also becoming increasingly apparent that agreements on investment.especially those that are an integral part of a firm’s globally integrated production and distribution system -. in particular on their role with respect to FDI and the recent trends in their number and distribution. one of the main challenges ahead is how to ensure that the development objective is given effect and translated into the structure. Consequently. Since countries throughout the world are actively competing for the productive growth opportunities that accompany foreign investment. the question of possible double taxation of income from foreign affiliates -. at least in principle.has become increasingly important and complicated (UNCTAD. In the case of a TNC. differences in national taxation norms may entail conflicting interests among all involved (Plasschaert. many countries see that it is necessary for them to examine the implications and appropriateness of international investment agreements. 1994. Put differently. pp.

e. This situation results from taxation taking into account both the source of income and the residence of the taxpayer. A more elaborated version of this approach is to analyse each of these elements in greater detail and to determine how they contribute.of issues and concerns that can be consulted when negotiating international investment agreements. in practice. The challenge is. the catalogue of development -friendly elements. Given the congruences. Such objectives could include.9). if disputes arise. indeed. as well as the development objectives.e. adjudicated. international double taxation is a phenomenon consisting of the concurrent exercise by two or more countries of their taxation rights. Such a catalogue would be compiled to make sure that. On the other hand.e.8. specific actions by the various parties involved). appears relevant. to spell out in operational detail what “structure” means beyond the statement of objectives and to transcribe it into workable formulations that can be implemented.Chapter III may tax income from foreign affiliates. when negotiating agreements.host countries. 75 . enforced. this kind of analysis may be indispensable because. Such a catalogue could be a checklist of elements -. predictable and transparent investment climate. a phenomenon generally deemed not to be conducive to business transactions in general and FDI in particular (box III. an investment-friendly environment is also a development-friendly environment. A third approach begins with the recognition that not only the contents (i. If international agreements can. Source : UNCTAD. At the same time. when it comes to “content”. strengthening domestic entrepreneurship. for example. securing a stable. of course. specific treaty provisions) of investment agreements need to be development-friendly.can be addressed in a mutually beneficial manner. singly or collectively. as should their implementation (i. home countries and investors -. it is important to ensure that the developmental needs and concerns of host developing countries are centrally addressed by any investment agreement so that it is development-friendly as well as investment-friendly in its orientation. regional. be helpful in this respect. be they at the bilateral.without a hierarchy among them -. but their very structure (i. which gives rise to overlapping assertions of jurisdiction and hence to double taxation. negotiators have indeed considered all relevant issues. Indeed. To a large extent. there are various approaches that might be appropriate. How and to what extent this objective can be served by international agreements that address investment issues is a question that is currently attracting considerable attention. Box III. increasing the quantity and quality of FDI flows. plurilateral or multilateral levels. and they are not necessarily mutually exclusive. suggestions and feedback from governments as well as other interested parties. it is possible that one element would counteract another. The development-friendliness of investment agreements Development is the fundamental objective of developing country governments and of the international community as a whole. such a catalogue would therefore include virtually all issues that need to be considered in the context of investment agreements. overall design or plan) needs to reflect this objective. • • UNCTAD’s efforts at identifying the development dimensions of international investment agreements draw on ideas. The ones that are outlined below are intended to be illustrative: • One approach is to establish a catalogue of development-friendly elements of international investment agreements. monitored and. and recognizing the non-discriminatory exercise of governmental regulatory power in pursuing development objectives. A second approach would be to identify a set of development objectives that international investment agreements should serve. More generally. Indeed. to a large extent. an important issue is how the concerns of the principal actors in this regard -. of an investmentfriendly environment and a development-friendly environment. to the development objectives of host countries.

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The principal response of governments to the challenges of double taxation presented by increased FDI is the extensive and still widening network of bilateral tax treaties which has developed over the past 30 years. There are currently around 1,700 bilateral double taxation conventions in existence (IBFD, 1998).12 The OECD Draft Taxation Convention/ Model Tax Convention (1963/1977/1992) (OECD, 1997b), and the United Nations Model Double Taxation Convention between Developed and Developing Countries (1980) have provided the framework for the great majority of these bilateral treaties. These models are quite similar, the main difference being that the OECD model favours residence taxation while the United Nations model gives more weight to source taxation (Goldberg, 1983). The main purpose of international taxation agreements is to deal with tax rights and thus with the allocation of revenues between countries. The contracting countries seek a balanced trade-off between their interests. With respect to developing countries, the challenge as host countries is to find a suitable balance between receiving a share of revenues from foreign affiliates operating in their territory and maintaining a climate that attracts FDI. In this respect, it is generally supposed that, having a smaller share of revenues as a result of tax concessions would in the long run be compensated for by increased inflows of FDI, associated technology and other benefits that are part of the FDI package. For capital exporting countries, as home countries, it is important, on the one hand, to keep their firms internationally competitive by allowing them to benefit from tax concessions in a host country and, on the other hand, to treat all its residents (or taxpayers) equally. In sum, in examining international taxation with reference to FDI and corporate activity in general, and with respect to developing countries (which are by and large host rather than home countries) in particular, the following broad questions are raised: • • how to divide or share the revenues between host and home countries; what kinds of methods to adopt, or which types of measures to take, for the benefit of the host or source country (this is related, among other things, to the definition of “permanent establishment”); and what method to use in order to encourage FDI, taking into account the tax benefits,if any, granted in the source country.

From the perspective of investing firms, the binding nature of a tax treaty as an international agreement contributes to a secure basis for FDI; the certainty engendered by the inclusion of rules in a tax treaty is valuable, even in cases where this does not involve a revenue concession, especially where there is a background of unstable domestic tax legislation. By adopting a treaty, a country commits itself in cases of dispute to the objective of avoiding double taxation through a mutual-agreement procedure and adopts an internationally accepted approach to dealing with transfer-pricing issues. Firms and their employees can expect that treaties using the United Nations/OECD model frameworks will be interpreted and applied consistently with the published Commentary on the provisions of the Model Convention (United Nations, 1997). It is generally believed that although, in form, the countries conclude a bilateral treaty, in substance, by concluding a treaty using an accepted framework, they subscribe to international rules immediately familiar to taxpayers -- rules that promote stability, transparency and certainty of treatment. These features may be at least as important to firms as the particular concessions or incentives that a treaty may contain.

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Double taxation treaties generally attribute the exclusive right to tax either to the country where income arises, or to the country of which the taxpayer is a resident. Alternatively, it may attribute this right to both, with an obligation imposed on the country of residence to provide relief for any resulting double taxation. Treaties are aimed not at establishing uniformity of application of taxes but at establishing tax criteria for the prevention of double taxation (Pires, 1989, p. 214). Typically, a double taxation treaty: • states its objective of resolving tax problems between contracting parties and determines its scope of application with regard to juridical or physical persons (ratione personae) and taxes (ratione materiae); sets out detailed allocation rules for different categories of income, e.g. income from real property, taxable without restriction in the source country; and interest income, subject to limited taxation in the source country;
Taxation Box III.9. Taxation principles Double taxation can arise in the case of the transnational operations of firms if both host and home countries claim the right to tax firms’ revenues. Two main principles underlie the jurisdictional basis of taxation: the first principle is related to the source of income or the site of economic activity (also known as the “territorial principle”); the second is related to the residence (or fiscal domicile) of the earning entity. According to the source principle, a country taxes all income earned from sources within its territorial jurisdiction. Under the residence principle, a country taxes the worldwide income of persons residing within its territorial jurisdiction. Varied criteria are used by countries to determine residence (e.g. for individuals, physical presence or home in a country; for corporations, place of management, head office or incorporation). Nearly all countries apply some combination of these two jurisdictional principles. Some Latin American countries, however, have traditionally taxed solely on the basis of the source principle. This is also a feature of the tax systems of South Africa and Hong Kong, China. Apart from these source and residence principles, the criterion of nationality is also applied by a few countries in the case of individuals. This is the case in the Philippines and the United States, whose tax systems combine that principle with the source and residence principles. Under the nationality principle, citizens of the United States, for example, are taxed on their worldwide income no matter where they reside. The United States likewise taxes aliens resident within its territory on their worldwide income and also taxes income derived by non-resident aliens from sources within its territorial jurisdiction. Firms incorporated in the United States, irrespective of the location of their head offices or seats or places of management and control, are taxed on their worldwide income, while foreign corporations are generally taxed solely on income derived from United States sources and effectively connected with a business such a corporation carries on in the United States. According to some views, taxation only on the basis of the source principle would encourage nationals or residents to invest abroad, thus leading to a flight of capital. It has been argued that countries using only the source principle have adopted it out of necessity because of the great difficulties their tax administrators would encounter if they attempted to find out how much foreign income was accruing to their residents. On the other hand, the residence principle, although based on overall capacity to pay, has proved to be of only limited significance in countries whose residents do not have substantial investments in other countries and whose fiscal administration is not well equipped to ensure its application.
Source: United Nations, 1997.

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establishes the arm’s-length principle as the standard for the adjustment of transfer prices by tax authorities in the case of transactions between associated enterprises (box III.10); contains rules giving exemption from tax or credit for foreign tax in the residence country, where income is taxable in the source country; contains rules on non-discrimination, 13 mutual assistance and the exchange of information; establishes procedures for mutual agreement between tax authorities to avoid double taxation in cases of dispute; and occasionally contains provisions on assistance in the collection of taxes.

Transfer Box III.10. Transfer pricing and double taxation treaties Transfer prices -- the pricing of goods and services in international intra-firm transactions - raise complex problems not only for firms engaged in cross-border production, but also for the tax authorities concerned. This is because the allocation of costs and profits between parent firms and foreign affiliates across borders is an area particularly prone to double taxation, and transfer prices determine in large part the income and expenses -- and therefore taxable profits -- of associated firms in different countries. Tax authorities are concerned about the loss of tax revenues and foreign exchange as a result of transfer-price manipulation. On the other hand, the authorities recognize the variety of business circumstances involved and the inherent difficulties of comparing intra-firm and external transactions. Model conventions and most double taxation treaties contain a description of associated firms with a view to helping countries allocate business income in transactions between associated firms. Treaties give tax authorities the opportunity to make adjustments in the contracting country to which profits are under-reported. They treat each firm, whether parent firm or affiliate, as a separate entity, and the income of each firm is determined by treating it as though it dealt with every other firm at arm’s length. The most difficult issue in applying the arm’s-length principle is the policing of the prices set by associated firms for transfers of goods, services and intangible property among them. For this purpose, they describe associated firms in terms of common control, management, or capital investment, either between two entities or through a third party. Where the allocation of profits between associated firms located in different contracting countries is distorted as a result of that status, the countries to which an associated firm has underreported profit may impose an adjustment on that firm to accrue the amount underreported. In order to protect against double taxation, most of the treaties provide that, in the event that one contracting country should make an adjustment, the other contracting country should make an appropriate adjustment restoring, as a result, the aggregate profits of the associated firm to its original level. Double taxation treaties also provide for “multilateral agreement procedures” to discuss their adjustments and correct discrepancies. This mechanism is actually used for resolving any disagreements arising out of the implementation of a treaty in the broader sense of the term. Such a mechanism is a special procedure outside the legal and judicial system of each contracting country and applies in connection with all provisions of the treaty and, in particular, to provisions on associated firms. As a consequence, if an actual allocation is considered by the tax authorities to depart from the arm’slength standard and the taxable profits are redetermined, taxpayers are entitled to invoke the mutual agreement procedure in the framework of which the action by tax authorities can be considered.
Source: Plasschaert, 1994, pp.1-3; United Nations, 1997 and OECD, 1997b.

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Effects 2. Effects of tax treaties
Tax treaties have their effects through the limitation of the contracting parties’ powers to tax. This is done in principle by devising methods for relieving double taxation. In existing treaties, two leading methods are followed for mitigating or eliminating double taxation (Muchlinski, 1995, p. 278). These are the exemption method and the credit method (box III.11). Tax treaties incorporating these methods adopt the following approaches. The source country exempts from taxation (or taxes at a reduced rate) certain categories of income but retains unrestricted taxation rights over other categories. Where the source country taxes at a reduced rate, the residence country gives a credit against its own tax for the tax imposed by the source country. Where the source country taxes without restriction, the residence country will either give a credit against its own tax for the tax imposed by the source country or exempt the income from its own tax.
III.11. Box III.11. Methods of relief from international double taxation In order to avoid double taxation, tax treaties include rules for its alleviation. In this respect, two main methods have commonly been used to mitigate international double taxation. The first is the tax-exemption method. So far as the income of firms is concerned, exemptions are confined by statute to profits of foreign permanent establishments and income from real property situated abroad. The main reason for the application of this method is that the exemption of foreignsource income from taxation by the country of residence may place the investor in a position of tax equality with residents of the source country, because the tax on that income is determined solely by the level of taxation in the source country. Thus, tax concessions granted by the source country are not reduced or cancelled by the tax of the investor ’s country of residence. Countries using the exemption method normally do not exempt dividends, interest and royalties from foreign sources from the domestic income tax. Many developed countries, however, grant special relief for domestic intercorporate dividends in order to eliminate or mitigate recurrent corporate taxation, first at the level of a foreign affiliate and then again at the level of the parent company. Some of these countries, either by internal law or by treaty, extend this exemption to dividends paid by a foreign affiliate to a domestic parent. When this method is applied within the framework of a bilateral tax treaty, one of the parties is granted the exclusive right to tax certain items of income. As in the case of unilateral exemption, the exemption by one party of all or part of an item of income may be integral or may occur with progression. In the case of full exemption, a country of residence might be forbidden to take the exempted item into account in computing its residents’ taxable income. The second method of double taxation relief is the credit method. Countries using this method reduce their normal tax claims on foreign profits by the amount of tax the investor has already paid thereon to the source country. The latter could thus raise its tax rate to the level of the tax of the country of residence without imposing an additional tax burden on the investor. Correspondingly, special tax concessions granted by the source country, which reduce that country’s level of tax below the level charged by the country of residence on that income, do not to that extent accrue to the investor ’s benefit. But this result is limited in its practical scope, since capital-exporting countries consider bona fide foreign affiliates engaged in production activities as being outside their national tax jurisdictions and do not tax their profits until they are repatriated in the form of dividends. Differences in definitions of taxable income used by host and home country tax authorities may create some difficulties. For instance, the home country authorities may define a corporation’s profit obtained in a certain country more narrowly than that country’s income tax authorities do, for example, as a result of differences in depreciation allowances or investment credits. The source country’s income tax may then be in excess of the tax that the home country would have assessed on that income, which is the upper limit on the tax credit allowed by the home country. Thus, even if the /...

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The essential feature of the exemption method is that the investor’s country of residence exempts from taxation certain items of income from foreign sources. Exemption is mainly granted in respect of active income; passive income such as interest, royalties or dividends is generally taxed, with a credit being given for foreign taxes. The exemption-withprogression method has been used in treaties concluded by Austria, Belgium, Germany, Finland, France, Iceland, Luxembourg, the Netherlands, Spain and Switzerland. In contrast, the main feature of the credit method is that the investor ’s country of residence treats the foreign tax, within certain statutory limitations, as if it were a tax paid to itself. Within the framework of a bilateral treaty, each of the contracting parties levies income taxes, but the country of residence permits income taxes paid to the source country to be deducted from its own income taxes, with certain exceptions. The treaty usually indicates which taxes qualify for the credit. A variant of this method (called “matching credit method” or “tax-sparing method”) has been developed, according to which the country of residence grants a tax credit calculated at a higher rate than the tax rate currently applied in the source country. Tax-sparing clauses have been included in many bilateral treaties concluded with developing countries by most of the major home countries including Canada, France, Germany, Japan and the United Kingdom. An interesting feature found in recent treaties is reciprocal extension of tax-sparing credit. It is also indicated that the adoption of this method tends to be limited in scope (list of incentives) and in time duration.

III.11, (Box III.11, concluded) host country statutory tax rate is less than the home country rate, it is possible that some part of the host country tax may be disallowed as a credit against home country tax. In the case of dividends in respect of minor (portfolio) holdings in foreign companies, countries applying the credit method normally deduct from their own tax only the foreign tax levied on the dividends as such. However, in order to eliminate or mitigate recurrent corporate taxation, significant capital- exporting countries adopting the credit method allow as a credit against the corporate tax due from the parent company not only the tax levied on dividends by the country where the subsidiary operates, but also the corporate tax paid by the affiliate as far as it relates to profits distributed to the parent company (so-called “indirect tax credit” or “credit for underlying tax”). According to the credit method, the tax burden on investment abroad is the same as that on domestic investment, provided that the tax in the source country does not exceed that in the residence country. This tendency towards equality of tax treatment may have serious implications for developing countries’ efforts to attract FDI, since their tax incentives may be nullified. No consequences follow from the use of the credit method while profits from tax incentives are reinvested in the operating subsidiary. However, if such profits are repatriated, the benefit of incentives may pass from foreign investors to the governments of their countries of residence in the form of an increased tax yield. A method that avoids this problem is the tax-sparing method (referred to as matching credit methods), which can be found in treaties which have been signed by many developed countries, especially European countries, with developing countries. Quite often, the country of residence has granted a credit not only for the tax actually paid in a developing country, but also for the tax spared by incentive legislation in the host country. There is recent evidence of increasing reluctance on the part of developed countries to adopt the tax-sparing method in their tax treaties. Concerns about the effectiveness of tax incentives and the abuse of tax-sparing provisions have prompted a reconsideration of the use of the tax-sparing method in new treaties and renegotiations of existing treaties.
Source: United Nations, 1980 and 1997; and OECD, 1998b.

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It is generally accepted that one of the most important effects of tax treaties is the legal certainty they provide to investors, in both the home and the host countries. Regardless of any changes affecting a host country’s tax system, foreign investors cannot be taxed beyond the levels allowed by a treaty. This effect is less comprehensive in the home country. In reality, certain changes in the home country tax system can affect the investor regardless of the existence of a treaty. For example, if the treaty provides for the credit method, a general increase in the corporate tax rate in the home country will also affect a resident deriving foreign-source income, regardless of the treaty. However, the exemption method, if adopted in the treaty, could not be modified at will by the home country. Tax treaties can have development implications and cannot, therefore, be fully separated from the context of various monetary, fiscal, social and other policies of contracting parties. When the parties are at the same or a similar level of development, the gain or loss of revenue resulting from reciprocal flows of investment does not have the same significance as when the parties are at different stages of development. The presumption of symmetries of gains and losses underlying tax treaties between countries at the same level of development is not applicable for countries at different stages of development. The loss of revenue may have a different “value” for a contracting party, depending on its level of development. For this reason, it could be argued that any eventual reduction in tax revenue from locally produced income should be offset by an increase in investment and technology flows. Since income flows are generally from developing to developed countries, a pattern of tax treaties in which the source country gives up revenue more often than not will not involve the rough symmetry of sacrifice which it might in tax treaties between developed countries. It should also be noted that developing countries, in their domestic laws, often introduce measures aimed at the alleviation of the tax burden of foreign investors, through a variety of tax incentives including income-tax exemptions, reduction or exemption of export proceeds, and reduction or exemptions of individual income taxes for foreign personnel. The benefits of these tax incentives for investors may exceed those resulting from tax treaties. These benefits are, however, offered unilaterally rather than in the context of an international agreement and it may be that foreign investors will value more highly the benefits of more modest reductions or exemptions given in the context of tax treaties with the attendant advantages of stability, transparency and certainty of treatment. From the perspective of host countries, having a smaller share of revenue, as a consequence of concessions offered either in domestic legislation or in the context of a tax treaty, could be (though it need not be) compensated for by increased flows of capital and technology into their economies as the result of an improved climate for FDI. A number of different views have been expressed on the role that the tax factor plays in attracting or inhibiting FDI (Plasschaert, 1994, pp. 46-47). Although this factor remains subsidiary to other factors, it is also generally accepted that, with the removal of barriers to FDI, taxation may gain more importance in investors’ decisions. Long-term investors may attach more importance to the general features of a country’s tax system than to its temporary incentives. In considering the role of the tax factor in attracting or inhibiting FDI, it may be important to distinguish the significance of incentives from that of other features of the tax system such as stability, transparency and certainty of treatment. Still, other things being equal, the tax factor could play a determining role in the choice of an FDI location and this in turn could give rise to a tax competition for investment (OECD, 1998b) (box III.12).

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Tax Box III.12. Tax competition The international tax environment is evolving as a result of the removal of capital controls and the continuing liberalization of financial markets, aided by the development of new communication technologies. As obstacles to the flow of capital are reduced, business decisions such as financing and investment have become more sensitive to tax differentials. As a response to these developments, governments of both developed and developing countries have become more inclined to use the tax regime to attract FDI, as evidenced by the rapid spread of preferential tax regimes. Preferential tax regimes have in common the opening up of profit-shifting possibilities without corresponding shifts in real activities. While these regimes were typically found in tax havens in the past, they have been adopted in recent years by an increasing number of other countries. Once one country introduces such a regime, others may find it necessary to respond with similar measures, thereby triggering a “race to the bottom” in the corporate tax field. This form of tax competition is viewed by an increasing number of countries as harmful because it distorts the flows of capital and reduces the tax base, making investment decisions tax-driven rather than commercially-driven. Recognizing that these issues can be effectively addressed only through international cooperation, both the European Union and the OECD have recently adopted non-binding instruments for dealing with harmful preferential tax regimes. These instruments, the European Union’s Code of Conduct (European Union Council, 13559/97/FIS 167) and the OECD Guidelines (OECD, 1998b), take as a starting point whether a jurisdiction imposes no or low effective taxes in identifying a harmful preferential tax regime. Other criteria considered include whether a regime is “ring-fenced” (i.e. whether it is partly or fully isolated from the economy of the country providing the regime), whether its operation is non-transparent; and whether the jurisdiction operating the regime fails to exchange information with other countries. While the European Union Code and the OECD Guidelines differ in some respects (the main difference being that the OECD Guidelines are limited to financial and other service activities, while the European Union Code covers all types of business activities), the general view is that they are broadly compatible and mutually reinforcing. Both instruments emphasize the importance of associating non-OECD countries with them. This reflects the concern that, unless the principles behind these instruments are widely accepted, the implementation of these instruments may provoke a displacement of activities to non-OECD countries. In addition to the Guidelines, the OECD has agreed on a number of recommendations to counter the harmful effects of tax competition. One of these recommendations proposes the development of an OECD tax haven list by October 1999. The objective is to identify and list, on the basis of certain criteria, tax jurisdictions that constitute “tax havens”. Other recommendations are:

Domestic level - that countries that do not have controlled foreign corporation rules or equivalent rules consider adopting them and that countries that have such rules ensure that they apply in a fashion consistent with the desirability of curbing harmful tax practices; - that countries that do not have foreign investment fund rules or equivalent rules consider adopting them and that countries that have such rules consider applying them to income and entities covered by practices considered to constitute harmful tax competition; that countries that apply the exemption method to eliminate double taxation of foreign source income consider adopting rules that ensure that foreign income that has benefited from tax practices deemed as constituting harmful tax competition does not qualify for the application of the exemption method; - that countries that do not have rules concerning reporting of international transactions and foreign operations of resident taxpayers consider adopting such rules; - that countries exchange information obtained under these rules; - that countries in which administrative decisions concerning the particular position of a taxpayer may be obtained in advance of planned transactions make public the conditions for granting, denying or revoking such decisions; and /...

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3. The universe of double taxation treaties14
The number of double taxation treaties (DTTs) has increased rapidly in the past four decades (figure III.3). By the end of 1997, 1,794 treaties, 15 covering 178 countries and territories, were in existence Cumulative number Figure III.3. Cum ulative n umber of DTTs and BITs, 1960-1997 (figure III.4). This compares with 1,513 BITs involving 169 countries at the end of 1997. Between 1960 and 1997, the rate of increase for DTTs has been steady while the rate of increase for BITs rose sharply in the late 1980s. Originally, DTTs were concluded mainly between developed countries. Over the Source : UNCTAD, database on BITs and database on DTTs. years, however, as first the developing countries and then the economies in transition became important host countries for FDI and also emerged as home countries, the universe of tax treaties expanded also to include them (figure III.4). The increased participation of

(Box III.12, concluded) that countries, in the context of counteracting harmful tax competition, should review their laws, regulations and practices which govern access to banking information with a view to removing impediments to accessing such information.

Tax treaty level - that countries should undertake programmes to intensify the exchange of relevant information concerning transactions in tax havens and preferential tax regimes constituting harmful tax competition; - that countries consider including in their tax conventions provisions aimed at restricting the entitlement to treaty benefits for entities and income covered by measures constituting harmful tax practices and consider how the existing provisions of their tax conventions can be applied for the same purpose; - that countries consider terminating their tax conventions with tax havens and consider not entering into tax treaties with such countries in the future; and - that countries consider undertaking coordinated enforcement programmes (such as simultaneous examinations, specific exchange-of-information projects or joint training activities) in relation to income or taxpayers benefiting from practices constituting harmful tax competition.
The recommendations also envisage that the OECD Model Tax Convention be modified to include such provisions or clarifications as are needed in respect of the earlier recommendations. To this effect, it is recommended that the Commentary on the Model Tax Convention be clarified to remove any uncertainty or ambiguity regarding the compatibility of domestic anti-abuse measures with the Model Tax Convention.
Source : OECD, 1998b.

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developing countries and economies in transition has not been limited to concluding agreements with developed countries.16 Indeed, since the 1980s, DTTs are increasingly being concluded between developing countries and between economies in transition (figure III.5). Other salient features of the universe of DTTs are (figures III.3-7): *

Figure III.4. Number of countries and territories with DTTs, 1960-1997

Whereas the top 10 countries with the highest number of BITs Source : UNCTAD, database on DTTs. include two developing countries (China and the Republic of Korea) and two economies in transition (Romania and Poland) (UNCTAD, 1998b), all of the top ten countries with the highest number of DTTs concluded are developed countries. The most prolific countries concluding DTTs in the 1990s have been the economies in transition. The leaders are Poland and Hungary, with 59 and 53 treaties respectively. Of the economies in transition in Central Asia, Kazakhstan led with 17 treaties. The region also has the second highest number of DTTs per country and the third highest number of intraregional DTTs. Thirty-five African countries have signed a total of 247 DTTs. Of these, only 26 are with other African countries. The average number of DTTs per country grew rapidly for North Africa in the 1970s and 1980s, most of the growth being attributable to Egypt, Morocco and Tunisia. Countries in Asia and the Pacific intensified their DTT activity in the 1980s. During the 1960s they had signed only 29 tax treaties and hence had a by Figure III.5. Number of intraregional DTTs, b y region, very low average number of 1960-1997 treaties per country in the region. Since then, 43 countries have signed a total of 560 treaties. Part of the growth in this number includes a substantial increase in the number of DTTs concluded within the region. Not surprisingly, the most active in the region were the East Asian countries. Latin American and Caribbean countries have signed a total of

*

*

*

*

Source :

UNCTAD, database on DTTs.

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218 treaties, but only 9 of these are intraregional. Argentina and Brazil lead the region with 27 and 21 treaties, respectively. This region has one of the lowest number of DTTs per country. * The United States has signed 154 DTTs, the highest number of any developed country, followed by the United Kingdom with 148 treaties.

concluded: Figure III.6. Number of DTTs concluded: top 20, 1997

***
If the universe of DTTs is compared with the universe of BITs it needs to be kept in mind that both types of treaties have specific but distinct purposes. The principal purpose of DTTs is to deal with Source : UNCTAD, database on DTTs. issues arising out of the allocation of revenues between countries; the principal purpose of BITs is to protect the investments that generate these revenues (and they do not deal with tax issues). They are therefore complementary. As developed countries were traditionally the principal home and host countries, DTT issues arose primarily between them, which is why most of the earlier DTTs were between developed countries. As developing countries were seen to involve certain risks for investors, BITs were initially concluded primarily between developed and developing countries; there are no BITs between developed countries. In the early 1960s, developed countries had signed 71 of 72 BITs with a developing country partner, whereas for DTTs the comparable number was Avera number verag country by Figure III.7. Avera g e n umber of DTTs per countr y, b y 35 per cent. The differences in purpose decade, region and decade , 1960s-1990s have also manifested themselves at the country level. Perhaps the most significant observation in this regard is that some countries with a high propensity to sign tax treaties have a low propensity to sign BITs. For example, the United States, by the end of 1996, had signed only 39 BITs, but had signed 154 DTTs. Similarly, India had signed 72 DTTs, but only 14 BITs. As developing countries became outward investors, and a good part of their investment was in other
Source :
UNCTAD, database on DTTs.

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developing countries (especially in Asia), they also began to conclude both types of treaties. The regional and intraregional distribution of DTTs compared with that of BITs is, therefore, becoming more similar, with the exception of the number of treaties signed between developed countries (figures III.2 and III.8).

concluded by country Figure III.8. DTTs conc luded in 1997, b y countr y group gr oup a

In general there is a positive relationship between the number of tax treaties and BITs signed by countries, a relationship that strengthened significantly in the 1980s and further in the 1990s (figure III.9).17 Developed countries have almost the same propensity to sign both BITs and tax treaties (921 and 1,222); the same applies Source : UNCTAD, database on DTTs. to countries from Africa (326 and 272), Asia a In 1997, 108 DTTs were concluded. and the Pacific (684 and 584) and Latin America and the Caribbean (330 and 228). Only the economies in transition have some catching up to do, having signed 770 BITs and only 299 DTTs.
by by decade, Figure III.9. The correlation between DTTs and BITs signed b y countries, b y decade , 1960s-1990s

Source :

UNCTAD, database on DTTs and BITs.

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In sum, the universes of BITs and DTTs, although having started from different points and for different -- but complementary -- purposes, are evolving in the same direction. The propensity to sign both types of treaties has increased -- a reflection of the growing role of FDI in the world economy and the desire of countries to facilitate it.

Notes
1 2

3 4 5

6 7 8 9 10

11

12

13

14

15

The absence of a specific FDI law or code does not mean that there are no national laws bearing on FDI, in one way or another. Frequent amendments of laws can cast doubts on the stability of a national legal regime, but the changes in FDI regimes referred to here are mainly in the direction of facilitating and attracting FDI and are thus contributing to improving the countries’ investment climate. As the granting of incentives can distort investment flows, their reduction has -- from this perspective -a similar effect as, for example, a decrease of barriers to FDI. On changes in FDI regimes before 1991, see UNCTC, 1978-1994. According to article 5.1 of the TRIMs Agreement, WTO members, within 90 days of the date of entry into force of the WTO Agreement, shall notify the Council for Trade in Goods of all TRIMs they are applying that are not in conformity with the provisions of the Agreement. “Declaration of Santiago”, Santiago, Chile, 19 April 1998, mimeo.. Ministerial Declaration of San Jose, 19 March 1998, annex II. “Working Programme for the FTAA Negotiating Groups” (FTAA, TNC/01), p. 5. The joint statement of NGOs arising from that meeting was endorsed by over 600 development, consumer, environment, citizens, human rights and indigenous people organizations (WWF-UK, forthcoming). The position of NGOs with respect to the MAI is reflected, among others, in Clarke, 1998; CI, 1996; CUTS, 1996; European Parliament, 1998; FOE-I, 1998; Korn, 1997; Oxfam, 1998; Public Citizen, 1998; WCC, 1998: WDM, 1997; WGA, 1997; WWF-International, 1996, 1997, 1998a, 1998b; WWF-UK, forthcoming. These efforts build on previous initiatives in the United Nations. Indeed, as early as 1978, the United Nations Economic and Social Council negotiated an “International Agreement on Illicit Payments”. In 1979, an almost complete draft of the Agreement was transmitted to the General Assembly which, however, decided to take no action on it (UNCTAD, 1996b, p .103). A broad definition of double taxation treaties (apart from agreements on income and capital) would include bilateral agreements on inheritance, gifts and air or sea transport. These agreements generally contain rules with fiscal implications. The non-discrimination clause is generally understood as a national treatment clause. The clause prohibits a treaty partner from granting to nationals of the other contracting party a treatment more burdensome than that granted to its own nationals, provided the former are in the same situation as the latter or a substantially similar one. It further ensures that none of the contracting parties treats companies in a differentiated way depending on whether their capital is held by its own nationals or by nationals of the other treaty partner. Mention should be made of the long-standing acceptance of the principle of nondiscrimination in international fiscal relations. In fact, long before the emergence of the double taxation treaty at the end of the nineteenth century, the principle of non-discrimination in fiscal matters had been embodied in many different types of international agreements under which each contracting party granted nationals of the other contracting party the same treatment as its own nationals (consular or establishment conventions, treaties of friendship or commerce, etc.). The international community has been dealing with the question of double taxation since 1928. For instance, the League of Nations was involved in the elaboration of rules governing the taxation of firms operating in two or more countries. In 1935, a draft convention was prepared. This total includes 26 multilateral treaties, but neither model treaties nor the treaty between France and Quebec.

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16 17

In this analysis, economies in transition include those in Central Asia. A simple regression yields estimated positive coefficients ranging between 0.26 and 0.43, with the highest coefficient for the 1990s. All were significant at the .05 per cent level. There was a jump in the constant term in the regressions that should also be noted. In the 1960s regression it was 1.054, but in the 1980s regression for the 1960s it was 3.133.

88

The ownership-specific advantages of the firm should be combined with the locational advantages of host countries (e. the presence of locational advantages in a host country.g.g. This may be the case for several reasons. • • While the first and third conditions are firm-specific determinants of FDI.Chapter IV CHAPTER IV COUNTRY HOST COUNTRY DETERMINANTS OF FOREIGN DIRECT INVESTMENT It is widely agreed that foreign direct investment (FDI) takes place when three sets of determining factors exist simultaneously (Dunning. monopoly rents). If the third condition is added to the first. the firm finds greater benefits in exploiting both ownership-specific and locational advantages by internalization. markets for assets or production inputs (technology. i. and the presence of superior commercial benefits in an intra-firm as against an arm’s-length relationship between investor and recipient. FDI becomes the preferred mode 89 . For another. the second is location-specific and has a crucial influence on a host country’s inflows of FDI. 1993a):1 the presence of ownershipspecific competitive advantages in a transnational corporation (TNC). and may involve significant transaction costs or time-lags. it may be in a firm’s interest to retain exclusive rights to assets (e. licensing or the sale of patents to service a foreign market. If only the first condition is met.can compensate for the additional costs of establishing production facilities in a foreign environment and can overcome the firm’s disadvantages vis-à-vis local firms. if they exist at all.e.g. proprietary technology) of a firm -.g. For one. knowledge) which confer upon it a significant competitive advantage (e. • The ownership-specific advantages (e. firms will rely on exports.if exploited optimally -. Finally. large markets or lower costs of resources or superior infrastructure). knowledge or management) may be imperfect. through FDI rather than arm’s-length transactions.

but only in the presence of location-specific advantages. The impact of international investment frameworks on FDI is examined separately.have gathered momentum and the possibility of a multilateral framework on investment has raised questions as to whether. resource-seeking or marketseeking FDI).1. Within the trinity of conditions for FDI to occur. a key question (one similar to that faced by the creators of the post-Second World War multilateral trading system) is what effect. FDI involves a long-term commitment to a business endeavour in a foreign country. regional or multilateral levels -. a multilateral framework on investment might have for the growth and pattern of FDI. licensing or portfolio investment. such as sustainable profitability and acceptable risk/profitability ratios. new or sequential FDI). While not as important as the other two sets of determinants. Then follows a review of business facilitation measures: as the world economy becomes more open to international business transactions. these measures are receiving increased attention. The objective of this chapter is therefore to review the location-specific (host-country) determinants of FDI flows and stocks and to analyze how these have changed in a liberalizing and globalizing world economy. locational determinants are the only ones that host governments can influence directly. their changing significance in the context of liberalization and globalization are reviewed next. why and how international investment agreements matter for the location of FDI and the activities of TNCs. Typically. there are many host country factors involved in deciding where an FDI project should be located and it is often difficult to pinpoint the most decisive factor. since that is a matter of special interest to countries in the light of recent international discussions. It often involves the engagement of considerable assets and resources that need to be coordinated and managed across countries and to satisfy the principal requirements of successful investment.g. the sector of • 90 .g.2 To explain differences in FDI inflows among countries and to formulate policies to capture inbound investment. This review of host country determinants begins with the role of national policies and especially the liberalization of policies (a key factor in globalization) as FDI determinants. in particular. the interrelationships among them must be borne in mind. (For a graphic overview of host country determinants of FDI. As distinct from trade. countries compete increasingly for FDI not only by improving their policy and economic determinants.whether at the bilateral. In particular.) Several caveats are required before reviewing the FDI determinants: • Direct investment abroad is a complex venture. Although the analysis that follows treats each of the three sets of determinants separately. see table IV. This need has become all the more topical as discussions and negotiations on international investment frameworks -. if any. The relative importance of different location-specific determinants depends on at least four aspects of investment: the motive for investment (e.Tr World Investment Report 1998: Trends and Determinants of servicing foreign markets. and the chapter ends with a review of issues related to the impact of international investment frameworks. it is necessary to understand how TNCs choose investment locations. but also by implementing pro-active facilitation measures that go beyond policy liberalization. Economic determinants and. the type of investment (e.

power. for example. administrative efficiency. • As a general principle.) after-investment services 91 . quality of life. These strategies aim. stand a good chance of attracting FDI. etc. telecommunication) cost of resources and assets listed under B. brand names). It is therefore entirely possible that a set of host country determinants that explains FDI in a particular country at a given time changes as the structures of its domestic economy and of the international economy evolve. Policy framework for FDI classified Type of FDI c lassified b y motives of TNCs A. But firms also see locational determinants in their interaction with ownership-specific and internalization advantages in the broader context of their corporate strategies. The relative importance of different determinants also changes as the economic environment evolves over time.Chapter IV investment (e. and matching competitors’ actions or looking for distinct sources of competitive advantage. Market-seeking Principal economic determinants in host countries • • • • • • • • economic. and/or host countries whose policies are most conducive to TNC activities. political and social stability rules regarding entry and operations standards of treatment of foreign affiliates policies on functioning and structure of markets (especially competition and M&A policies) international agreements on FDI privatization policy trade policy (tariffs and NTBs) and coherence of FDI and trade policies tax policy • • • • • • • • • • market size and per capita income market growth access to regional and global markets country-specific consumer preferences structure of markets raw materials low-cost unskilled labour skilled labour technological. it can aim at diversifying markets as part of a riskreducing strategy. Host countr y determinants of FDI able IV. it can translate into the desire to acquire market power.1.) social amenities (bilingual schools. only the most important host country determinants will be examined. host countries that offer what TNCs are seeking. in the case of another TNC. adjusted for productivity for labour resources other input costs. firms and clusters physical infrastructure (ports. roads. Resource/ asset-seeking II.1. For example. the same motive and the corresponding host country determinants can acquire different meanings. and for still another TNC. e. in the case of one TNC. This points to the need for host countries not only to understand the motives of potential investors but also to understand their strategies. pursuing oligopolistic competition. transport and communication costs to/from and within host economy and costs of other intermediate products membership of a regional integration agreement conducive to the establishment of regional corporate networks Resource/ B. the market-seeking motive can translate. services or manufacturing) and the size of investors (small and medium-sized TNCs or large TNCs). Economic determinants III. at spreading or reducing risks. In the analysis that follows. Business facilitation Efficiency-seeking C. etc. including as embodied in individuals. into the need to enter new markets to increase the benefits arising from multiplant operations.g.g.g. At the same time. In the context of different strategies. country country Host countr y determinants I. innovatory and other created assets (e.3 Tab le IV. Efficienc y-seeking • • • • • • • • investment promotion (including imagebuilding and investment-generating activities and investment-facilitation services) investment incentives hassle costs (related to corruption. there are also location-specific determinants that remain constant.

1997a). To achieve these objectives. If privatization welcomes foreign investors. It focuses first on the role of liberalization in attracting FDI and then addresses the question of how the role of regulation has changed in a liberal global environment. The national FDI policy framework Core FDI policies consist of rules and regulations governing the entry and operations of foreign investors. China pursued laissez-faire trade and FDI policies. countries in Latin America used a mix of protectionist trade policies combined with policies allowing FDI in manufacturing.reducing or increasing FDI. For example. It has two dimensions: an FDI-policy dimension and a competition-policy dimension. 1996a and 1997a). They typically satisfy various objectives -. the FDI policies of such economies as the Republic of Korea. encouraging specific contributions to the economy and affecting ways in which these contributions are made. 1995a). have contributed to a more cohesive policy framework. • Policies used intentionally to influence FDI and its location constitute the “inner ring” of the policy framework for FDI. The following section discusses FDI policy itself as a host country determinant. These policies can range from outright prohibition of FDI entry to non-discrimination in the treatment of foreign and domestic firms -. The competition-policy dimension becomes relevant if. 92 . in contrast. Hong Kong. the sale of a privatized company to a domestic or foreign investor only means the transfer of a monopoly from the state to a private agent (UNCTAD. Globalization has led to yet further changes affecting the FDI framework which are discussed in greater detail in subsection 2 below.Tr World Investment Report 1998: Trends and Determinants A. FDI policies are usually accompanied by other policies that also influence investors’ decisions. 1996b). Taiwan Province of China and (previously) Japan were embedded in a broader set of industrial policies guiding and selectively inducing TNCs to link up with local firms to help increase local innovative and export capacities (UNCTAD. used both FDI and trade policies (e. it broadens the scope of FDI. The features of such a framework vary among countries and also vary over time in the same country. the standards of treatment accorded to them. International investment agreements provide an international dimension to national FDI policies. For example. Asian countries. coupled with more liberal trade policies. as it involves purchases of firms from the state. exemptions from import duties) to encourage TNCs to contribute to their export-oriented economic strategies. Some of them focus on insurance and protection. trade policy plays the most prominent role. and the functioning of the markets within which they operate (UNCTAD. This has become obvious since the broad-front advance of more market-based economic policies began in the mid-1980s. while others deal with broader issues (UNCTAD.g. in industries characterized as natural or near-natural monopolies.and even preferential treatment of foreign firms. influencing its sectoral composition or geographical origin. Core FDI policies themselves have become more liberal and. Among these supplementary policies used to influence locational decisions. to attract FDI and to maximize its contributions to their import-substituting development strategies. Other related policies may include privatization policies and policies determined by the international agreements a country has signed: • Privatization is a special case of acquisition. On the other hand.

however. such as sweeping nationalizations of foreign affiliates. By the time the Act was repealed in 1985. FIRA was established as a result of rising government and popular concern with the high share of TNC sales and assets in a number of crucial industries of the Canadian economy. given the very high exchange value of the Canadian dollar coupled with relatively low productivity. The Act and the purchases were not completely independent events: by reducing foreign firms’ opportunities for growth. 19-25).. Box IV. although not by a great deal.1. Canada began to review inward FDI. Minister of Supply and Services.3). Open policies are basically intended to induce FDI -. Statistics Canada. There was also no evidence suggesting that FIRA operated successfully as a discriminating monopsonist in its dealings with United States firms. of which 84 per cent were allowed and 16 per cent were either rejected or withdrawn. Restrictive policies. The Act required a review of “… most acquisitions of control by non-Canadians of existing businesses in Canada … and the establishment of new businesses in Canada by non-Canadians who either did not already have a business in Canada or did not have a business to which the new business was or would be related” (Canada. FIRA may well have had a greater impact on Canada’s popular image as a host to FDI than on either the volume or profitability of investment. perhaps in anticipation of non-approval. more than 3.Chapter IV 1. Foreign-owned firms declined in importance “… as a result of changes in ownership mainly through government and private acquisitions…” (Canada. against 8 per cent (ibid. respectively. Among others.5 billion in 1978 and 1979. Ltd. 3). p. Reviewing FDI in Canada With the passage of the Foreign Investment Review Act (FIRA) in the early 1970s. a This single acquisition reduced the foreign share of Canadian assets by 1. The overall conclusion was that while more accurate measures of the existing variables or the addition of other variables might provide evidence of a more significant negative impact. The reduction in foreign ownership resulted not only from the restrictions on new FDI contained in the Act but even more from the purchases of foreign-owned assets by Canadian public enterprises. An econometric investigation of the effects of FIRA on the flow of United States direct investment into Canada found only a weak evidence of a negative impact (Kudrle.600 proposed foreign investments had been reviewed.1.) IV. even though the restrictions on inward investment were largely removed in the 1980s. The rate of rejections and withdrawal was much higher in resource-based industries and in services than in manufacturing: 20 per cent and 19 per cent. table XXI). from the Phillips Petroleum Company of the United States by Petro-Canada at a total cost of about $1. can effectively close the door to FDI. as radically restrictive policies can pretty much guarantee theirs. FIRA was found to have affected directly only new business cases and acquisitions.but the inducement may not be taken. However.. p. such as the purchase of equity in Pacific Petroleums. 93 . It should be noted. they cannot guarantee their desired results. 19). 1985. that policy changes in the direction of openness differ in an important way from those in the direction of restriction: even when extensive. p. 1980. Its potential relevance is also evident when policy changes sharply in the direction of more or less openness. see the discussion of Canadian FDI policy in box IV. (For the effects of more moderate restrictive policies. the Act increased the willingness of foreign parent firms to sell Canadian affiliates and lowered the prices that Canadian entities had to pay for them. 1995). FIRA might have affected FDI from other countries more unambiguously than United States FDI.1. It provided for a Foreign Investment Review Agency to advise the minister responsible for the administration of the Act to decide whether a proposed foreign investment would provide “…significant benefit to Canada…” (ibid. and not all FDI inflows. The foreign share in Canadian output declined from the early 1970s through at least 1992. pp. on the other hand.6 percentage points and was accompanied at about the same time by a private purchase that caused Husky Oil limited to be reclassified from United States to Canadian control (Canada. Minister of Supply and Services. Source: UNCTAD. a Another reason for the decline in foreign ownership could be the relative unattractiveness of Canada as a site for exportoriented manufacturing. 1985. FDI policy as a determinant The importance of core FDI policy as a determinant is best illustrated by the obvious fact that FDI cannot take place unless it is allowed to enter a country.

2.2. 94 per cent contributed to creating more favourable conditions for FDI (chapter III. table III. the foreign-owned share of industrial production rose from 8 per cent in 1990 to 33 per cent in 1993 (Lipsey. Other cases are furnished by some countries in Central and Eastern Europe. In other countries. The liberalization of FDI policies /. however. but not a sufficient. but FDI inflows remain low. Box figure . the leader in FDI liberalization. The stock of FDI in that region was less than $200 million in 1985 and less than $3 billion in 1990. host country determinant of investment. where inward FDI stock rose from $3 billion in 1985 to $169 billion in 1997 (chapter VII).2). The process of liberalization of FDI policies Defining FDI liberalization FDI liberalization is a dynamic process that involves the following (box figure): (a) the tempering or removal of those market distortions that result from restrictions applied specifically (and. barriers to entry and operations) and from the granting or withholding of incentives and subsidies that discriminate in their favour or against them.g.2 and box IV. the liberalization of FDI frameworks has become the dominant type of FDI policy change: of the 151 FDI policy changes that occurred during the period 1991-1997. despite the impressive performance of the region as a whole. Box IV. it had risen to $66 billion by the end of 1997 (chapter IX). where the liberalization of FDI policies has had little effect on FDI flows. Perhaps the most significant change in FDI performance has occurred in China. These examples underline the fact that open FDI policies are a necessary. The most conspicuous example of the importance of FDI liberalization as a locational determinant (but by no means the only one) is the experience of Central and Eastern Europe.. Box figure. Blomström and Ramstetter. IV.Tr World Investment Report 1998: Trends and Determinants Since the mid-1980s. similar changes in FDI policies have not had similar effects on FDI. In China’s Guangdong Province. 1998). where regulatory frameworks in most countries are quite open (chapter VI). discriminatorily) to foreign investors (e. 94 . hence. A case in point is Africa..

There are also indications that certain operational conditions .2. and (c) the strenghtening of market supervision to ensure the proper functioning of the market (e. particularly after privatization (e. especially. On the other hand. Others. Certain types of performance requirements have been reduced or have become more transparent as a result of international commitments and transitional measures under the TRIMs Agreement (see chapter III above).g. “golden shares”) are limited to certain strategic industries. including well-functioning courts. banking and finance. The distinction is not an easy one in practice. have become more focussed and tend to be voluntary. Liberalization.g. as most countries have gradually moved to open traditionally closed industries. Fade-out requirements have virtually disappeared. closing the market for further entry. national treatment. given the close interlinkages between FDI. the policy frameworks for all three would need to be consistent and moving in the same direction.. It follows from the foregoing that. How far has the liberalization of FDI gone? restrictions Reducing restrictions Today. 95 . although some authorization requirements and restrictions on the number of foreign firms allowed remain in many countries (both developed and developing) for some “strategic” industries (e. 1994a).g. fishing. Ownership requirements and control restrictions (through. such as the existence of a comprehensive legal framework for business activities. although some restrictions remain. Indeed.. the liberalization of FDI involves difficult policy choices among desired outcomes and significant trade-offs between objectives (UNCTAD. most-favoured-nation treatment. broadcasting. Moreover. replacing them with registration.such as performance requirements or those relating to the hiring of foreign managerial personnel . A distinction must be drawn between policies aimed at liberalizing FDI and policies aimed at creating a favourable investment climate and. a variety of restrictive measures have also been used to attract FDI. other public utilities and the construction of public infrastructures.2. However.Chapter IV IV. prudential supervision). fair and equitable treatment). In a number of developed countries /. often in the course of their privatization programmes (e. the number of activities in which FDI is barred or restricted has been considerably reduced. as liberalization progresses. no single country grants unrestricted right of entry to all activities. is also required to ensure predictability and certainty of business operations. nor is it necessarily the most effective one under all conditions. (Box IV. are essential to give meaning and effect to the liberalization of FDI. not covered under the TRIMs Agreement. A properly functioning legal order.are becoming less significant. for maximum effect. the liberalization of FDI regimes does not imply a weakening of the role of government. however.g. at attracting or promoting FDI. their overall beneficial effects depend to a considerable extent on the presence of effective supervision of the market. While the first two elements are indeed central to FDI liberalization. telecommunications) and often apply to both foreign and domestic firms. mining. it becomes increasingly visible. telecommunications. especially in the manufacturing sector but also increasingly in natural resources and services. overall. competition rules. for example. but rather a redefinition of some of its functions and the strengthening of others. is not the only possible method of attracting FDI. Most countries have eliminated authorization requirements for the entry of greenfield FDI. trade and the dissemination of technology. These have also become more targeted and tend to discriminate less either in favour of or against foreign investors. air transport. oil and energy). disclosure of information. continued) (b) the strengthening of certain positive standards of treatment for foreign investors (e.g. public transport. Indeed. The two types of policies are closely linked in a means-end relationship: the principal objective of both is to attract FDI. required mainly in return for incentives. The broader context within which foreign affiliates operate inside a country is also relevant and. broadcasting). for example. certain aspects of the internal normative framework. all countries admit FDI in principle.

The reason for the ineffectiveness of FDI liberalization in such cases is not necessarily the absence of locational advantages but the scarcity of firms with ownership-specific advantages and. Strengthening treatment Str engthening positive standards of treatment The standards of non-discrimination and national treatment of FDI after its entry into the host country are now reflected in the laws and international agreements of many countries (often with certain qualifications and exceptions). and financial markets. stock exchanges. The number of countries having competition laws has increased from less than 40 in 1980 to over 70 in 1997 (UNCTAD. as are the principles of due process and fair and equitable treatment. FDI but there is no guarantee that investment will actually occur. Most restrictions on outward FDI have also disappeared in developed countries and are being gradully reduced in a number of developing countries and transitional economies. as exemplified by the rapid increase of the share of these industries in the total outward FDI stock of the United States from below one per cent in 1990 to nearly three per cent in 1996. the negative effects of restrictive policies are much stronger than the positive effects of liberal policies. In some industries liberalization has produced rapid and significant responses by foreign investors. where there are advantages.those producing pencils.other things being equal -become more important influences on the locational decisions of investment projects. including many developing countries. A liberal policy framework “determines” FDI in the sense that it enables TNCs to invest in a host country: it allows. especially in industries characterized by simple technologies. lack of motive to internalize them. Most have also established mechanisms to supervise international mergers and acquisitions. the trend towards a liberalization of FDI policies is indeed pervasive and has led to a convergence of FDI regimes.liberalization has not led to more FDI and trade and domestic production have remained the dominant modes of serving local markets.Tr World Investment Report 1998: Trends and Determinants Similar variations in the effects on FDI flows may be found when sectoral policies are liberalized. In sum. (Box IV. The number of developing countries that have signed bilateral. standardized goods. concluded) (for example.2. In communications and public utilities.4 In manufacturing industries.1). after most countries in Latin America and in Central and Eastern Europe took to signing them.2. on the other hand. are also granting foreign investors legal protection and guarantees against non-commercial risks. specific differences -. To the extent that FDI policy frameworks become similar. regional and multilateral agreements dealing with the treatment and protection of FDI after entry has increased dramatically in the 1990s. towels or toothbrushes -. IV. the TNC response to policy liberalization has been swift. 1997a. among members of the European Union) certain types of incentives are now prohibited or subject to ceilings. intense competition and low transportation costs -. Exchange restrictions on the repatriation of profits and capital have become exceptional measures reserved for cases of serious balance-of-payments difficulties in most countries. Source : UNCTAD. figure V. 96 . Strengthening controls Str engthening market contr ols An increasing number of countries in all regions have adopted or are strengthening antitrust laws. Host countries. although numerous and at times significant differences remain. In brief. in others not. Policy liberalization is a necessary but not a sufficient determinant of FDI and other determinants have to come into play for investment to flow into the country. and may even encourage.

host countries have increasingly come to realize the importance of adopting proactive measures to facilitate business transactions by foreign investors and of improving the economic determinants of FDI.) Broadly speaking. The outcome of all this is that. (The dividing line between these two types of policies is increasingly being blurred. as outer-ring policies move into the inner ring. At the same time. it has drawn attention to other policies that may affect FDI but that have not been specifically considered in this context in the past. The accelerating process of FDI liberalization has led countries to extend more open policies into industries long considered sensitive (e. Competing intensely with one another for FDI and finding that liberal policies are no longer enough. as well as technological progress in telecommunications and transportation. although the effects of interest rates on FDI are smaller than on domestic investment because TNCs normally have a greater choice of sources of financing. Indeed. which in turn creates incentives to liberalize FDI policies. These could be seen as constituting the “outer ring” of policies in the FDI context. the “inner ring” of policies discussed earlier. influence all types of investment.5 97 . such as the establishment of fully owned subsidiaries. which determine the parameters of economic stability such as the rate of inflation and the state of external and budgetary balances. provided TNCs with an ever-increasing choice of locations and they have become more selective and demanding as regards other host country determinants.Chapter IV 2. M&As and participation in privatization programmes. permitted TNCs to pursue increasingly regional and global strategies.g. air transportation) and to permit forms of FDI entry previously considered less desirable. while the liberalization of FDI frameworks has contributed to an acceleration of FDI flows by creating more “space” for them. This has. and to integrate their production structures on a regional or global basis. a process of diminishing returns has set in and liberal FDI policy is increasingly losing its effectiveness as a locational determinant of FDI. 1993a). progress in the liberalization of trade. These are mainly monetary and fiscal policies. as distinct from the core policies directly used to influence FDI. it was the liberalization of national policy frameworks that helped unleash one of the key driving forces of globalization as we know it today: increasing international production by TNCs. outer-ring policies can be divided into macroeconomic and macroorganizational policies: Macroeconomic policies . The speeding up of liberalization and the simultaneous weakening of its effectiveness as a determinant of FDI has extended the scope of FDI policy frameworks. This mutually reinforcing process has in fact shaped international production in recent years and led to its integration at a deeper level than the shallow integration based on arm’slength trade and flows of financial capital (UNCTAD. including those affecting taxes and exchange rates: • Monetary and fiscal policies. in turn. they directly affect one of the determinants of the investment decision. In particular. telecommunications. Since they determine interest rates and thus the cost of capital in a host country. The impact of globalization The relationship between FDI policies and globalization runs both ways: each affects the other.

g.g. there are structural policies influencing the industry composition of manufacturing (e. there are policies that affect the supply and quality of productive resources in a host country. Exchange-rate policy is related to stability and may influence FDI decisions by affecting the prices of host country assets. one of the consequences of the worldwide trend towards the liberalization of FDI policies has been the realization by countries that.g. The realization that almost all of these policies can affect FDI is relatively recent. and the competitiveness of foreign affiliate exports. deregulation of service industries). A case in point is technology policy. the spatial composition of economic activities (e. and the composition of activities by type of ownership and intensity of competition (e. these policies have been oriented more towards building technological capacity. It is now widely understood that environmental policies may influence FDI or that policies vis-à-vis small and medium-sized enterprises may facilitate FDI through creating a pool of potential suppliers of competitive intermediate products to foreign affiliates. • • To sum up. In the past. This has in 98 . such as labourmarket policies that may have either a discouraging or an encouraging impact on inward FDI. the value of transferred profits. the value of these policies as tools to influence locational decisions becomes less pronounced. Recently. policies vis-à-vis sunset and sunrise industries). for example. developing countries encouraged the transfer of technology through FDI and some also tried to control the outflow of technology payments. regional development policies). Finally.7 • Macro-organizational policies . Other things being equal. as their FDI policies proper become similar. They have encouraged links. the functional composition of activities (e. including corporate and personal tax rates and thereby influence inward FDI. a country with lower corporate tax rates should stand a greater chance of attracting an FDI project than a country with higher rates.g. between foreign investors’ research and domestic industries through the provision of tax credits. There are also policies determining the functioning of factor markets. although with different degrees of intensity. Thus. Host countries are instead increasingly evaluated by potential foreign investors on the basis of a broader set of policies within which FDI policies are embedded. educational and health policies that raise the supply and quality of human capital in a country or policies that promote infrastructure development can improve a country’s locational advantages substantially and give it an edge over others.6 Personal tax rates may affect managers’ choices as regards the location of regional headquarters and may affect the hiring of foreign personnel. Such policies can affect not only the quantity of FDI a country receives but also its quality. Some of these policies have been used in the FDI context for some time.Tr World Investment Report 1998: Trends and Determinants • Fiscal policies also determine general tax levels. These affect patterns of resource allocation as well as the structure and organization of economic activities and include the following: • First. or provided information and services to facilitate technological partnerships between domestic and foreign companies. R&D policies).

it leads to the emergence of new policy areas that cut across traditional policies such as those affecting the production and use of created assets. Countries that have changed their FDI policies. and requires also the long-term improvement of the economic determinants of investment. the need for promotional action arose when countries changed their attitudes and policies towards the role of FDI in their development from negative to positive. Third. 9 Promotional actions were also taken to shorten the delayed reactions of investors to emerging investment opportunities' or to help investors. 275). but investors did not respond to the changes or responded more weakly than desired. the chapter takes up business facilitation measures as FDI determinants. 1990). and countries that were invisible or unattractive to investors have all begun to resort to it (UNCTAD. Historically. the reduction of the “hassle costs” of doing business in a host country (e.consisting of reducing barriers for inward FDI. such measures have proliferated rapidly and become increasingly routine. at one point undertook information and advertising campaigns aimed at changing unfavourable perceptions concerning their investment climates (Wells and Wint.is. who continued to perceive them as places not friendly to FDI. Such countries had to deal with an image problem vis-à-vis foreign investors. Few of these measures are entirely new. 8 This enabling act is increasingly complemented by proactive measures. it makes greater demands on the effectiveness of FDI-related policies: to be effective. a new type of resource increasingly sought by TNCs. Business facilitation From the perspective of foreign business the liberalization of core FDI policies discussed in the preceding section -.g.1). especially 99 . Before discussing this most important set of determinants. p. it leads to the realization that an effective national FDI policy framework requires a thorough understanding of the determinants of TNC decisions regarding foreign investment. it vastly expands the number of policies constituting what investors consider a good investment climate. countries that wanted to regain investors’ attention. by and large. a level-playing field for all investors and thus makes it possible for them to take action. 1995a. aimed at facilitating the business that foreign investors undertake in a host country (table IV. reducing or eliminating corruption and improving administrative efficiency). above all. and most generally. With time. promotional activity has become more important. the provision of incentives to foreign investors. and the provision of amenities that contribute to the quality of life of expatriate personnel. Business facilitation measures include promotion efforts. they need to be coherent within a broader set of policies.Chapter IV turn several consequences. B. Second. First. their liberalization efforts have been increasingly complemented by promotional programmes. Governments have become increasingly aware that it is one thing to change a policy. As many developing countries and virtually all economies in transition have faced similar problems. including in particular the broader corporate strategies of TNCs. pervasive and sophisticated. Finally. what is new is that. strengthening standards of treatment for foreign investors and assuring the proper functioning of markets -. typically executed by investment promotion agencies (IPAs) that were newly established or transformed from earlier screening and monitoring agencies. Ireland and Canada. and quite another to get the information to FDI decision makers -. for example.let alone convince them to make an investment). in a globalizing world economy. seen as an enabling act aimed at creating a framework that establishes.

most BITs do not grant a right of establishment.12 together with bilateral investment treaties (box IV. in accordance with due process and accompanied by compensation. a State-to-State dispute-settlement provision is also virtually universal. when there are various agreements applying to the investments covered. most treaties specify that. Bilateral investment treaties: similarities and dif ferences An important characteristic of bilateral investment treaties (BITs) is the considerable uniformity in the broad principles underlying the agreements.be they developed. most treaties provide for fair and equitable treatment. as mentioned in the last section. at least 95 countries had such programmes in 1997 (annex table A. the more favourable provision among them applies. 10 Finally. a prohibition on imposing performance requirements .4).e. Such actions were also aimed at shortening psychic distances between host and home countries. export conditions and employment requirements . treaties now grant national treatment. There is a core of provisions that is common to a large number of BITs. investment incentives (box IV. i. broad and open-ended so that it can accommodate new forms of foreign investment. Consequently.Tr World Investment Report 1998: Trends and Determinants small and medium-sized firms.such as local content. membership in the Multilateral Investment Guarantee Agency and. namely: • the definition of investment is asset-based. If membership of the World Association of Investment Promotion Agencies (WAIPA) can be taken as a proxy.on the investor as a condition for the entry or operation of an investment.3. Intensified competition for FDI has also led to more proactive policies aimed at actually bringing in FDI and servicing it when received. the standards for determining the modalities of compensation are often described in different terms that could potentially result in similar outcomes.IV. it includes tangible and intangible assets and generally applies to existing as well as new investments. and an investor-to-State dispute-settlement provision has become a standard practice. is found in virtually all BITs. the principle also often being subject to qualifications (to take into account the different characteristics between national and foreign firms) and exceptions (relating mainly to specific industries or economic activities. 11 These programmes have become one more tool governments use to attract foreign investors. a guarantee of free transfer of payments related to investment is common to virtually all BITs. some BITs include one or several of the following provisions: • • a requirement that the host country ensure investors access to information on national laws. entry and establishment of investment is encouraged. a guarantee of most-favoured-nation (MFN) treatment. developing or in transition -.has increased rapidly. although typically subject to national laws and regulations. differences Box IV.3).1). the weakening impact of liberalization by itself has induced governments to “want to do more” to influence FDI location decisions. or to policy measures such as incentives and taxation). such as prohibiting arbitrary or discriminatory measures or prescribing a duty to observe commitments concerning investment. discover new opportunities that they would not find on their own. subject to some standardized exceptions. although it is often qualified by exceptions applicable in cases of balance-of-payments difficulties. virtually all BITs recognize the right of the host country to expropriate subject to the condition that it be for a public purpose. Source : UNCTAD.3. often qualified by more specific standards. perhaps. coupled with numerous variations in the specific formulations employed. the number of countries with investment promotion programmes -. Investment-generating measures can consist IV. a commitment to permit or facilitate entry and sojourn of foreign personnel in connection with the establishment and operation of an investment. and a guarantee of national and most-favoured-nation treatment on entry and establishment. • • • • • • • • In addition. non-discriminatory. forthcoming b. • • 100 . with a growing number of BITs providing the investor with a choice of mechanisms.

15). showed clearly the shift of focus of these agencies’ activities from image-building to investment-generation (Wells and Wint.single organizations supposed to be able to handle all matters related to FDI projects (Wells and Wint. 1997b. 78 per cent of the IPAs stated that they have tried to develop a process of encouraging foreign investors to reinvest through upstream and downstream linkage activities (UNCTAD. only 28 per cent of IPAs from developing countries and 53 per cent from developed countries answered ”yes”. there is a growing awareness that satisfied investors are the best evidence of a good investment climate in a host country and that. Wint. A case study of ten IPAs from developed and developing countries.1) and especially as regards investment incentives is largely similar. incentives have been used to compensate foreign affiliates for additional costs 101 . 279). the weight of these considerations among various factors guiding promotional decisions also increases. Such services consist of counselling. p.that is the reinvestment of earnings by established foreign affiliates -. therefore. 30). were known before. The story as regards other business facilitation measures (table IV. IPAs face budgetary constraints which have not yet allowed them to translate this awareness into workable comprehensive programmes. 1997b. undertaken in the late 1980s. if such a system was computerized. they were introduced to increase the efficiency of FDI liberalization. Under the pressures of competition for FDI in a globalizing economy.can be a significant source of FDI (in the case of United States foreign affiliates it can account for up to a half of the annual outflows of FDI). As FDI stock increases. 54). indicating that many of these systems may be quite rudimentary (UNCTAD.though at the same time difficult and costly -. they can help to attract other investors. Secondly. 1993). 1994). p. corporate strategies have set other priorities). to prevent divestment (UNCTAD. p. services rendered to established foreign affiliates regarding day-to-day operational matters (Young and Hood.Chapter IV of direct mail or telephone campaigns or industry-specific investment missions. which aroused investors’ interest but did not necessarily lead to investment. although after-investment services have become one of the standard functions undertaken by IPAs. 46). for example. there seems to be considerable room for improvement in them (Young and Hood. because bureaucratic barriers facing investors after a project was approved were frequently so high that they discouraged would-be investors. 1993. that is. But the most important and promising -. if the expansion of a foreign affiliate is not possible for reasons beyond the reach of the host country (because. cited above. 36). a no less important objective is to retain the existing level of FDI. Investment-facilitation services are another increasingly important component of promotional activities in both developed and developing countries (Young and Hood. For example. Initially. i.activity is targeting firms that are likely to respond to promotion efforts and to invest in a given host country. if not all. And a survey conducted by UNCTAD in the mid-1990s among 81 IPAs confirmed that a great majority of them “had a system for identifying and attracting investors”.e. One is the realization that sequential investment -. Most of these. however. However. 1995a. When asked. especially in activities considered particularly desirable from the host country’s point of view (Wells. According to the UNCTAD survey. 1994. p. 1991). although countries are aware of the importance of afterinvestment services. 1994. 13 The reasons for the inclusion of these services in investment promotion efforts are twofold. they frequently led to the creation of “one-stop shops” -. Needless to say. But then it may be that. In developing countries and some developed countries. investmentfacilitation services have been extended to include after-investment services. p. accelerating the various stages of the approval process and providing assistance in obtaining all the needed permits. p. 1990.

or to influence the character of an investment. Sometimes. reduction of the standard corporate income-tax rate. Today. Box IV. those resulting from economies of scale. because they are increasingly considered an unnecessary hassle which might discourage foreign investors. government grants. Incentives to attract FDI are What ar e incentives? Incentives are any measurable economic advantage afforded to specific enterprises or categories of enterprises by (or at the direction of) a government. The main types of incentives used are fiscal incentives (e. They do not include broader nondiscriminatory policies. It is not in the public interest that the cost of incentives granted exceed the value of the benefits to the public. they also have the potential to introduce economic distortions (especially when they are more than marginal) that are analogous to subsidies on trade. the general regulatory and fiscal regime for business operations.g. The range of incentives and the number of countries.the classic infant-industry argument used in a very different context. Competition for FDI with incentives Governments use incentives to attract FDI..g. tax holidays. to steer investment into favoured industries. closing the market for further entry. p. While these policies certainly bear on the location decisions of TNCs. They include measures either to increase the rate of return of a particular FDI undertaking. In a global economy. accelerated depreciation. protection from import competition. In a more dynamic context of growth and development. investment and reinvestment allowances. and box IV. 1995a.14 But the use of investment incentives has proliferated..4. The range of incentives available to foreign investors and the number of countries that offer incentives have both increased considerably since the mid-1980s. However. free repatriation of profits or the granting of national treatment. Incentives can thus be justified to cover the wedge between the private and the social returns on an investment. preferential government contracts). in order to encourage them to behave in a certain manner. In sum. although sometimes only foreign investors can access certain incentives (as when special incentive packages are geared towards large projects or specific foreign investors. government equity participation. government insurance at preferential rates) and market preferences (e.Tr World Investment Report 1998: Trends and Determinants related to performance requirements imposed by host country governments. In addition. incentives can be justified to correct the failure of markets to reflect the gains that can accrue over time from declining unit costs and learning by doing -. incentives can serve a number of development purposes. 290.4). the creation of widely diffused knowledge and the upgrading of skills of mobile workers. subsidized credits. many countries are experiencing increasing incentives competition among regional or even local /. provinces and local authorities that offer them has increased considerably since the mid-1980s (UNCTAD.4. 102 . performance requirements are used less frequently. Economic rationale for incentives The economic rationale behind incentives is to correct the failure of markets to reflect the wider benefits arising from externalities in production -. they are not FDI incentives per se. exemptions from import duties). most investment incentives are directed to domestic and foreign investors alike. Other types of incentives frequently used include preferential treatment on foreign exchange and subsidized dedicated infrastructure and services. Incentives can also be justified to compensate investors for lost return due to other government interventions (for example. financial incentives (e. for example. countries even engage in direct competition for specific investment projects with financial and other incentives. the general legal regime for FDI. activities or regions. and such competition can be very costly. duty remissions on imports or performance requirements) or for carrying certain public costs where a government lacks the institutional capacity to bear them itself. as. or where advanced technologies are involved that can only be provided by foreign investors). when technologyintensive investment is being sought.g.for example. or to reduce (or redistribute) its costs or risks. as barriers to FDI and trade have declined. relating to the availability of physical and business infrastructures. and they involve financial and administrative costs. granting of monopoly rights. IV.

many countries have increased their incentives with the intention of diverting investment away from competing host countries.g. Foreign investors may respond differently to different types of incentives depending on their strategies. as regards individual investment projects. However. there is considerable evidence to suggest that incentives are a relatively minor factor in the locational decisions of TNCs relative to other locational advantages. there will be a tendency to overbid.4. concluded) authorities to attract FDI. mining and oil exploration. Whatever the rationale for FDI incentives. production costs.g. economic stability and the quality of the general regulatory framework. some governments continue to offer incentives in agriculture. 1973) found that export-oriented investors seeking inexpensive labour valued fiscal incentives more highly than market protection or other incentives. if it were otherwise. 1996a. Also. adequate infrastructure. forthcoming and Phelps. In such competition for FDI. 103 .. However. 1983. effect The effect of incentives on investment decisions In spite of this competition. In an open world economy. they are ultimately successful only to the extent that they succeed in attracting investment to a country away from another. in which barriers to FDI are falling. developed countries make more use of financial incentives than of fiscal ones. incentives are becoming increasingly focused and targeted and are sometimes contingent upon certain conditions being met by the investor. on the other hand. Source : UNCTAD. and 1992). such as market size and growth. while incentives do not rank high among the main FDI determinants. Dunning.e. although market reforms and the introduction of competition policy in an increasing number of countries are narrowing the scope for these incentives. While manufacturing industries are still the main focus of incentive programmes. the incentive would be superfluous. it is difficult to discern clear patterns across countries and regions on the type of industries or activities favoured by incentive programmes. the poorer countries are relatively disadvantaged. et al. their impact on locational choices can be perceptible at the margin. a member country of the European Union or a country with a large national market. Market-seeking investors. while the establishment of enterprise zones and research parks did. Market incentives have played an important role until recently. skill levels. In the case of regional incentives. 1998. e. food processing and petrochemicals . In brief. i. Mytelka. However. For example. e. 1992) concluded that fiscal incentives and financial aid did not influence location. As a general rule. partly because fiscal incentives are less flexible and their adoption involves more difficult parliamentary procedures. production costs and markets (Guisinger. Competition for FDI with incentives is pervasive not only among national governments but also among sub-national authorities. governments have also intervened through the creation of markets (with defence expenditures and government purchasing) and research funding.many companies reported that incentives were frequently not even considered and simply made an already attractive country more attractive. or North of England and North of France (Bridge. robotics. computer software) and in infrastructure projects. particularly grants. thus further multiplying the number of incentive programmes available to foreign investors. (Box IV. a wide variety of incentives are being offered for foreign investors to transfer advanced technologies and attract R&D facilities (including tax reductions. especially for projects that are cost-oriented and mobile. Investment decisions were made mainly on the basis of economic and long-term strategic considerations concerning inputs. In fact.Chapter IV IV. computer. financial incentives. in a survey of 30 TNCs covering 74 investment projects in four industries -. value market protection more than fiscal incentives. 1998). seem to have a greater impact on investors’ decisions than fiscal incentives. between Scotland and Wales. 1989. fisheries. a recent study (Vallanchain and Satterthwaite. Ireland and Scotland. then incentives can play a decisive role in choosing. presumably because these countries lack the resources needed to provide financial incentives. 1998c. subsidized infrastructure and land and industrial parks).automobile. countries often offer a broad array of options linked to different objectives. there is increasing evidence that when the location is broadly determined. the conclusions have tended to support the research undertaken in past decades. bidders may offer more than the wedge between public and private returns. Although there has been considerable recent research on the effects of incentives on overall FDI flows. In recent years. However. A number of studies that have analyzed incentive preferences by type of investor (Reuber et al. The effects can be both distorting and inequitable since the costs are ultimately borne by the public and hence represent transfers from the local community to the ultimate owners of the foreign investment. When governments compete to attract FDI. An increasing number of countries target investment activity in industries involving technology and high value-added (such as electronics. and the investment were to take place anyway. to set up regional headquarters). Some countries are also offering incentives to encourage companies to locate specific corporate functions within their territories (say.4. this pattern is reversed in developing countries.

incentives may have an impact on influencing the precise choice of location within the region or country.all of which take time (UNCTAD. or if other components of the investment climate are unsatisfactory.5). 104 . and the widespread use of English (UNCTAD. overall. especially in a regional context: IPAs look at what their competitors are doing and try to catch up. particularly focusing on the electronics sector of the United States (UNCTAD. a decision has been made to undertake FDI in a given region or a given country. p. these factors were wellgrounded in a broader effort aimed at establishing a favourable investment environment and covering in a comprehensive manner all areas of importance to investors (Jegathesan. While this is a good example of successful investment generation by an IPA. then. which was generated through investor targeting by Malaysia’s Industrial Development Authority (MIDA) including specific investment missions to capital-exporting countries.17 Highly publicized cases of successful investment promotion activities underline this very clearly. the upgrading of a country’s human resources or the strengthening of its physical infrastructure -. 276-277). 1994a. p. which are driving forces in any competition and increasingly lead to benchmarking. there is much evidence that. which had identified Apple Computers as a potential investor and persuaded it to invest there even before the company had invested elsewhere abroad (Wells. With respect to the effectiveness of business facilitation measures (and especially of promotional measures and incentives) as FDI determinants. Moreover. If one country in a region or one locality in a country offers incentives and another does not. infrastructure or the nurturing of small potential suppliers to foreign affiliates. this success was possible because of the presence of broader economic and other factors such as the availability of productive human resources at competitive costs. the establishment of a sound macroeconomic framework. such as those of Ireland and Costa Rica (which recently succeeded in attracting a $500 million FDI project by Intel). a stable and open economy.16 Such measures are thus quite different from actions aimed at ensuring political and economic stability. 1993. Malaysia followed the earlier example of Singapore. As regards incentives alone. they try to distinguish themselves from their competitors by doing more and leaving them behind. One frequently cited case of successful investment-generating activities relates to United States FDI in the Malaysian electronics industry. Convergence is taking place as regards instruments which are inexpensive and easy to use as well as promotional measures that are expected to have an immediate effect on a country’s investment climate. 51). no promotional efforts or incentives will help it to attract significant FDI. p. 1994a. however. it has to be kept in mind that they can only play a supporting role and will rarely be decisive factors. 311).15 Even better. The result is a certain trend towards a convergence of policies and practices. Examples from other parts of the world. 1995a. show a similar pattern: promotional efforts played a certain role (box IV. not only in the area of FDI liberalization but also in the area of business facilitation. 1998). they are not an important element in the set of factors that determine inward FDI. but this role was possible because of economic determinants that were continuously upgraded by government policies in such areas as education. this was possible because Singapore could capitalize on its economic determinants which were being continuously upgraded. Once. pp. But again. If a host country does not have some basic economic determinants (discussed in the next section) in place.Tr World Investment Report 1998: Trends and Determinants The proliferation of similar policies and practices is driven by demonstration effects. well-developed transportation and communication infrastructure. 74).

100 to 1. The Industrial Development Agency (IDA) of Ireland took a central role in coordinating efforts involving both national and local authorities and developing a range of incentives and promotional efforts to approach potential foreign investors systematically (IDA. In the 1980s. it has persistently upgraded education. In 1997. high value-added industries. from a zero base in the late 1950s to a situation where almost 60 per cent of gross output and 45 per cent of employment in manufacturing is in foreign-owned export-oriented firms. The objective of this policy. 1996). 299. creating specialized industrial clusters in designated locations. For example. Ireland has become one of the largest exporters of software.5. tilting the balance in favour of the incentives provider (UNCTAD. namely electronics. grants favouring exporters had to be extended to all newly established firms (Ruane and Görg. the IDA introduced the concept of special industrial zones to generate “clusters of new activity” (Tillett.5. Applied alone. Finally. after Lotus set up software operations in Ireland. and promoting links to domestic firms. 1798). Tillett. laid down in the Control of Manufactures Act. 1996. produced by 600 companies employing some 19.18). for example. 1989. The pattern of inward investment in Ireland has been visibly influenced by this policy. Ireland made a concerted effort to increase the level of education. computer software. 1997. Price Waterhouse.000 persons. 1998. 1998. which had barely existed before the Second World War. Ireland’s Box IV. There IV. At the firm level.” (Barry and Bradley. as is an enabling policy framework for FDI. one should not overestimate the importance of business facilitation-related FDI determinants. p. and grants for establishing R&D facilities (up to 50 per cent of the costs of fixed assets and a share of other expenses of such facilities). 1997). 1996). for the country as a whole. business facilitation measures are not sufficient for FDI to take place. p. When Ireland joined the European Economic Community in 1973. with the abolition of the Control of Manufactures Act and the establishment of the Shannon Free Airport Development Company in 1959. other software companies also established affiliates in the vicinity (Tillett. financial services. the government offers employment and training grants. The strategy had three core elements: • • • selecting leading. The overall result is a “…quite phenomenal growth of export-oriented FDI in manufacturing. investment promotion strategies became more focused on certain attractive sectors. grants for financing new machinery and equipment. and international services. some 1. office machinery and electrical engineering. p. Tillett. 1997. The inflow of FDI into the country since the 1950s has served to create new comparative advantages in industries such as chemicals. and Jegathesan. 105 . To encourage FDI to tap these sites. 1996).Chapter IV other things being equal. this industry. 1995a. Fiscal incentives have included fixed-asset grants designed to reduce the cost of building or refurbishing factory premises. The electronics industry has emerged as the second largest industry in Ireland. incentives can influence locational decisions between these countries and localities. In the course of the 1950s. industrial policy began to reverse. With respect to regional development policy. p. was to reserve the gains from infant-industry protection for locally owned firms. as the qualifications of the labour force were not a major initial attraction. Ireland’s FDI policy Foreign ownership of firms operating in Ireland was not allowed between the early 1930s and the late 1950s with the exception of firms established before 1932. IDA approaches “flagship investors” with the aim of using these leading firms to pull in other firms from the same industry. 1997). through marketing and R&D (Ruane and Görg. so that some 40 per cent of school-leavers are now engaged in tertiary education (Ruane and Görg. To conclude.31. led by about 200 foreign-owned companies. p. Neither are they necessary. based on information received from the Industrial Development Agency of Ireland.200 foreign firms were active in Ireland. 7). medical instruments. Source: UNCTAD. generated over one-third of export revenues in 1997.

each of them reflecting the principal motivations of TNCs for investing in foreign countries: resource-seeking. Traditional economic determinants a. This section reviews the economic determinants of inward FDI. In the nineteenth century “much of the FDI by European.Tr World Investment Report 1998: Trends and Determinants are enough examples of considerable investment inflows into countries that used neither promotional techniques nor incentives (Brazil in the 1970s and 1990s and Indonesia in the 1980s). In addition. Traditional 1. resour esources Natural resources Historically. 57). Wherever relevant. During the first half of the 1990s (19911995). even if this category of determinants is not equal in importance to the other two categories. additional factors that facilitate FDI flows are also noted. After the War. The underlying assumption is that an enabling framework for FDI is in place unless otherwise specified.). market-seeking and efficiency-seeking (table IV. the relative importance of natural resources as a host country FDI determinant has declined. Investment took place when resource-abundant countries either lacked the large amounts of capital typically required for resource extraction or did not have the technical skills needed to extract or sell raw materials to the rest of the world. 62). Comparative advantage in natural resources usually gave rise to trade rather than to FDI. infrastructure facilities for getting the raw materials out of the host country and to its final destination had to be in place or needed to be created. and analyses how they have changed over time. focussing on the principal ones.1). Above all. 106 . Economic determinants The economic determinants of inward FDI can be grouped for analytical convenience into three clusters. neither should it be underestimated. the presence of natural resources by itself was not sufficient for FDI to take place. because business facilitation measures can indeed make a difference -. As with the evolution of FDI regulations. 1993a. p. FDI/TNC database). while the convergence of investment regimes and business facilitation practices reduces the relative effectiveness of these determinants. the United Kingdom and the United States was below 5 per cent and. France alone had a share as high as 9 per cent (UNCTAD. these determinants have changed in response to the forces of liberalization and globalization. primary products for the (then) investing industrializing nations of Europe and North America” (Dunning. C. Even when it was prominent as an FDI determinant. 1993a.especially in little-known investment locations or in countries implementing reforms and improving their FDI policies or with concrete individual investment projects. In the case of major home countries. notable differences in this respect may assume greater significance when it comes to locational choices. Japan. among major investors. the share of this sector in the total outflows of Germany. about 60 per cent of the world stock of FDI was in natural resources (ibid. p. the most important host country determinant of FDI has been the availability of natural resources. United States and Japanese firms was prompted by the need to secure an economic and reliable source of minerals. especially since the 1960s and 1970s. the share of the primary sector in their outward stock of FDI decreased from almost 25 per cent in 1970 to 11 per cent in 1990 (UNCTAD. But. Up to the eve of the Second World War.

This motive was paramount. or non-equity arrangements. a high growth rate in a host country tends to stimulate investment by both domestic and foreign producers.Chapter IV While the decline in the importance of natural resources as an FDI determinant can be attributed to a decline in the importance of the primary sector in world output. including TNCs. especially in the United Kingdom. usually state-owned. following voluntary export restrictions and the possibility of further protectionist measures in the automobile industry. As growth is a magnet for firms. the availability of natural resources is still a determinant of FDI and continues to offer important possibilities for inward investment in resource-rich countries. for example. Australia) and countries in transition (Azerbaijan. developing (e. in absolute terms as well as in relation to the size and income of its population. In fact. this should have made market size and growth strong host country determinants for FDI in the services sector. FDI was no longer necessary and host countries could revert to trade based on comparative advantage. b. in the wave of United States investments in Europe. Theoretically. although the principal reason was not the existence of tariffs. during the early post-war period (Dunning. Traditionally.g. National markets were also important for many service TNCs. and market growth (table IV. From a host country’s perspective. Large markets can accommodate more firms both domestic and foreign (especially important for nontradable services).g. during the heyday of import-substitution industrialization. National markets An important group of traditional economic determinants of inward FDI corresponds to the need of firms. 1998a. countries in sub-Saharan Africa). Natural resources still explain much of the inward FDI in a number of countries. the relevant economic determinants for attracting market-seeking FDI include market size. a reconfiguration of conditions at both firm and country levels reflecting the changing relationship between developing host countries and natural-resource-seeking TNCs also played a role. while inward stock in developing countries increased more than sixfold (UNCTAD. This does not mean that FDI in natural resources has declined in absolute terms. Market access became the predominant motive for investing in the manufacturing sector of developed countries between the two world wars and of developing countries in the 1960s and 1970s. and can help firms producing tradable products to achieve scale and scope economies. developed (e. to grow and/or to stay competitive by gaining access to new markets at home and abroad and/or increasing existing market shares. This reconfiguration was characterized by the emergence of large indigenous enterprises in many developing countries. but the fact that most services were not tradable and therefore the only way to deliver them to foreign markets was through establishment abroad. p. and in Japanese investments in the United States after the mid1980s. This meant that. Though declining in relative importance. 1996a.1 and the annex to this chapter). FDI gave way to joint ventures with TNCs.5). the inward FDI stock in the primary sector of developed countries increased more than fivefold during 1975-1990. In other cases. in a number of cases. p. market size and growth as FDI determinants related to national markets for manufacturing products sheltered from international competition by high tariffs or quotas that triggered “tariff-jumping” FDI. But the size of this investment was small 107 . Kazakhstan and Russian Federation). 258). with sufficient capital and technical skills to permit governments to rely on them for the production and distribution of raw or processed products.

Tr World Investment Report 1998: Trends and Determinants compared to the size of the services sector. in many cases opening them up to FDI. but also 108 . FDI and technology flows has created enlarged markets for final and intermediate goods and services. pp. Combined with their general management expertise. turning it into one of their ownership-specific advantages.g. The availability of low-cost unskilled labour. They have thereby also redefined the determinants of inward FDI. As most of the technological improvements were carried out by firms. 2. mostly because of restrictive FDI frameworks in both developed and developing countries. Traditional inward FDI determinants and the types of FDI associated with them have not disappeared in a globalizing economy but their importance is declining. but it began to flourish only under conditions of globalization and will therefore be discussed in the next section. c. In addition. This is so especially for TNCs seeking greater efficiency in producing labourintensive final products or for TNCs producing final products for which some stage of production. has been the most prominent among them. technological improvements in products including services and processes like marketing have become the key to competitiveness. The opening of markets to trade. The impact of globalization The principal forces that have driven the globalization process. to assets that can provide a competitive edge. Technology and a capacity for continuous innovation are the key created assets. technological improvements in transportation and telecommunication technologies have also provided TNCs with the ability to coordinate and manage their assets across borders and to service markets anywhere in the world. geographically separable from other stages. unless it is offset by host governments’ interventions to raise the price through minimum wage laws or high social insurance taxes. or the labour is made inaccessible by distance or poor infrastructure.e.improvements in technology. indeed. were typically publicly owned monopolies and foreign ownership in financial services such as banking and insurance was either not permitted or restricted. in a number of industries. 95-97) -have led to a reconfiguration of the ways in which TNCs pursue their resource-seeking. This type of FDI began to emerge in the 1960s. and the resulting competitive pressures (UNCTAD 1996a. Availability in this sense implies not only abundance but low costs relative to productivity. telecommunication). FDI and technology flows. Technology has become one of the most important tools for competition. market-seeking and efficiency-seeking objectives. is intensive in the use of unskilled labour. and has provided TNCs (and domestic firms) with better access not only to national. largely immobile. the result was a pool of companies with enhanced ownership-specific advantages that put them in a better position to become TNCs. TNCs have now enhanced their internal capacity to manage global complexity. A low price is a natural consequence of abundance. there are also other locationspecific economic determinants of FDI reflecting other types of TNC motivations. for example. Infrastructural services. Other traditional determinants Apart from natural resources and national markets. markets more open to trade. regional and international markets. i. Improvements in technology have contributed to the deregulation of a number of important service industries (e. alone or in combination with one another -. This in turn underlines the importance of access to created assets.

to integrate international production. from both developed and developing countries. 1993a).g. With technological improvements enhancing the ability of firms to expand production and the opening of markets creating space for such an expansion. increased their access to immobile resources (unskilled labour. marketing expertise embodied in enterprises). they accounted for 14 per cent of world FDI outflows. relatively independent from parent companies and without links to other affiliates of the same parent firm. they typically had to offer more by way of the quality and quantity of this resource to prevail in competition with other countries. They are used by TNCs facing competitive pressures and aim at reducing the production costs of labourintensive products or processes in the value-added chain (UNCTAD. limits on the movement of factors of production and overwhelmingly non-tradable services. subcontracting. Simple integration strategies In a world with trade barriers. The number of TNCs in 14 OECD countries rose from about 7. Existing TNCs have responded by making the acquisition of locational assets -. Enterprises that are not TNCs -. subcontracting). TNCs pursued differentiated strategies based on stand-alone foreign affiliates.g. The principal locational advantage needed to attract FDI guided by this strategy is unskilled labour. What follows is a discussion of these strategies and their implications for host country determinants of FDI. They entail the transfer of these products or processes to foreign affiliates.and no longer as protected by national protectionist regimes as in the past -. large and small. But as countries with abundant unskilled labour interested in attracting this type of FDI have never been in short supply.000 in 1991 to around 9. This has enlarged the range of choices that TNCs have regarding the modalities of serving these markets (especially FDI. firms have sought new opportunities to improve their growth and competitive positions. In the management of locational assets firms can pursue a variety of strategies. Simple integration strategies have been the first step in this direction.an important part of their competitiveness-enhancing strategies. e. Thus they were mostly horizontally organized enterprises with plants in a number of countries. This is reflected in the growing number of TNCs.1) are involved in different ways in these strategies: Resources.000 by the mid-1990s. low-cost skilled labour. The three clusters of locational economic determinants (table IV. trade. the reliability of its supply and the level of its skills.and their most efficient organization -. compared to 2 per cent in the late 1970s.000 in 1968/1969 to about 34. licensing. Other 109 . a. many of them obviously small and medium-sized enterprises. and improved the efficiency of their international production systems. Only under conditions of globalization did TNC strategies give rise to vertically integrated TNC structures.000 by the mid-1990s. also in other sectors.Chapter IV to markets for factors of production and other resources. simple and complex. controlled through equity or non-equity arrangements (e. Vertically integrated structures were limited to natural-resource TNCs.have responded by undertaking FDI so as to acquire new locational assets. The total number of TNCs stood at an estimated 52. The number of TNCs from developing countries grew from around 4. spread across the globe. established in countries that offer the locational advantages required by these processes. franchising).000 by the mid-1990s. By 1997.

This sort of investment has always been mobile (for example. the importance of FDI policy and especially business facilitation including incentives has increased greatly. in response to wage increases. the cost and productivity of labour as well as the cost of physical infrastructure are the most important determinants of FDI. and sports equipment) as well as towards the labour-intensive aspects/components of otherwise capital-intensive industries (e. toys. in most cases it also loses foreign affiliates relying on such access. driven by price-based competition. It is the loss of this advantage (in most cases due to wages rising in excess of productivity) that may lead to the relocation of a foreign affiliate to other countries offering more competitive conditions. skills and productivity. As cost reduction is the principal driver of this type of strategy.19 Access to international markets. And if a host country loses access to international markets. most of this type of investment would be concentrated in countries with abundant unskilled labour.18 Markets. but also the immediate adjustment of design or product specifications in response to demand changes caused. it is always labour plus other advantages: if labour alone were sufficient to attract FDI. Though the principal resource sought is labour. in economies in transition. educated and trained labour has become an important resource. (e. because the competition among countries for this type of investment is most intense. Simple integration strategies are not new. textiles and clothing. In addition to physical infrastructure and the availability of inputs like energy and water. the nature of locational advantages related to this type of investment has also changed: • As more countries compete for this type of investment. or at least to markets of developed countries. costs and time needed to transport goods over long distances were reduced. for example. They were typically geared towards labour-intensive industries. If a host country enjoys privileged access to large developed country markets. stricter labour laws or changes in quotas that affect access to final markets). If this access is limited by tariff or non-tariff barriers. it only began to prosper when barriers to trade and FDI were lowered. The market of a host country is not the primary consideration here. At the same time. in practice. and communication technology permitted not only the overall coordination and management of affiliates located even in different continents. more recently.20 In addition. the advantage is correspondingly limited. this gives it an important locational advantage. Although this type of strategy and associated FDI has limits determined by the declining share of labour costs in the total costs of manufacturing and of tradable services. by sudden shifts in fashion. the increasingly sought-after advantages are competitive combinations of wages.21 • 110 . they offer locational advantages that go beyond low-cost labour. Typically. semiconductors in the electronics industry and electrical wiring in the automobile industry). Efficiency. shoes.g. While low-cost labour remains a locational advantage.g. which it is not. is particularly important. They began to emerge on a visible scale when the first export processing zones were established in the late 1960s and 1970s. foreign affiliates established within the framework of this strategy are located in developing countries and.Tr World Investment Report 1998: Trends and Determinants resources include the availability and quality of physical infrastructure for exporting the final output produced by such labour.

While. Complex integration strategies The forces of globalization have heightened the preoccupation of firms with their competitiveness. Examples are NAFTA. their ability to survive and grow while attaining their ultimate objective of maximizing profits (UNCTAD. As a consequence. b.especially a computer-literate labour force and a reliable and competitive telecommunication infrastructure -. higher-quality and less mobile FDI. firms are increasingly pushed beyond simple integration strategies. have to be harmful to a host country. This has indeed happened in labour-intensive industries in the newly industrializing economies of Asia (UNCTAD. In other words. parts production. 1995a. as well as foreign affiliates that capitalize on their experience through indirect FDI and have moved up-market towards designing and organizing and controlling networks of suppliers of various labour-intensive goods spread over several countries. 1995a. complex integration strategies. p. or segments of these activities. • Some host countries with an abundant supply of low-wage unskilled and skilled labour have been able to consolidate these advantages by gaining durable or even permanent access to large markets of developed countries through regional integration schemes. it may signal an economic restructuring process involving increasing labour productivity. firms increasingly seek locations where they can combine their own mobile assets most efficiently with the immobile resources they need to produce goods and services for the markets they want to serve. in which the lower grade of FDI is replaced by a new. The discussion so far has focused on locational advantages related to efficiency-driven strategies in labour-intensive manufacturing processes.Chapter IV but this mobility has now increased dramatically and so has the risk of losing the locational advantage for this sort of FDI. towards complex integration23 that permit them to benefit to the highest extent possible from the international portfolio of their locational assets. namely. Services that have become tradable include such simple labour-intensive activities as data entry and such skill-intensive ones as the production and servicing of software programmes. chapter V). with each of them carried out by affiliates in locations best suited to the particular activity.are able to attract FDI in industries in which it did not exist before. and act as intermediaries between these suppliers and client firms in developed countries. These improvements have permitted TNCs to pursue more sophisticated competitiveness-enhancing strategies. firms split up the production process into various specific activities (such as finance.22 TNCs undertaking this type of FDI also include firms from developing countries. This process creates an international intra- 111 . however. R&D. training. Technological improvements in the area of telecommunications and computers make it possible to extend these strategies to information-based services by increasing their tradability. that is. accounting. Such a loss does not. in a number of these schemes. In pursuing this objective in a liberalizing and globalizing world economy. distribution). the Lomé Convention and the association agreements of the European Union. this has not always been the case and has usually occurred only if other economic determinants were favourable. and the acquisition of new skills and capabilities. 126). the Caribbean Basin Initiative. Host countries that have been able to develop locational advantages in this respect -. market access has led to increased FDI flows into labour-intensive industries. which in turn draw on a wider range of other locational advantages of host countries.

there is a growing expectation by firms that the inner ring of policies directly related to FDI will be expanded. and competition forces firms to take advantage of these opportunities to integrate their locational assets.Tr World Investment Report 1998: Trends and Determinants firm division of labour and a growing integration of international production networks.24 For competitiveness-enhancing investments.6). as the boundaries between types of FDI disappear. But there is also a growing range of goods and (tradable) services for which FDI is seen as a means of increasing competitiveness. predictability. For example.remains the principal determinant for natural-resource-seeking FDI. countries that offer an adequate combination of the principal locational determinants that are important for global corporate competitiveness.B). they blur the lines between the traditional clusters of economic determinants. and access to markets can attract TNCs that pursue integrated international production strategies.markets. decisions as to where to locate are based on the best possible combination of the principal locational determinants in the light of their expected contribution to the competitiveness of the corporate system as a whole.typically for export to the world market -. What does this mean for the economic determinants of FDI? Satisfying or possessing at least one of the principal determinants may no longer be sufficient for a host country to be successful in the highly competitive world market for FDI. because these projects are flexible as far as locations are concerned. transparency. the traditional determinants continue to be influential (box IV. Furthermore. access to local markets remains key for non-tradable services that must be produced when and where they are consumed. Liberalization creates the opportunities for such networks to emerge. the host country’s membership in MIGA. Also taken for granted is that the national policy framework is complemented by BITs (box IV.which used to be distinct and distinguishable into a single motive: enhancing competitiveness. conditions for efficient operations. Furthermore. namely. preference would be given to locations that are open and well connected to the global economy. high-quality resources/assets. technological progress (especially in information and communication technology) makes it possible for such networks to be operated efficiently on an international basis. and coherent policies that recognize the importance of strong complementarities between trade and FDI. Instead. state-of-the-art enabling framework is taken for granted as far as FDI policies per se are concerned. The implication is that TNCs pursuing integrated international production strategies will avoid locating activities in countries in which they fear a possible loss of freedom to operate internationally. Similarly. Complex integration strategies thus combine the pursuit of the three factors motivating FDI -. in spite of a shift in the relative importance of different economic determinants and the need for combining them effectively.3). It is for projects in this range that countries compete in the world FDI market. resources and efficiency -. For such investments. Rather. Complex integration strategies therefore make it increasingly difficult to point to a single locational determinant. a stable. the Convention on the 112 . The precise interaction of the principal locational determinants for competitivenessenhancing FDI varies across goods and services. and the applicability of relevant international treaties such as the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. double taxation treaties (chapter III. and characterized by stability. the availability of natural resources -. And.

) Some of the largest national markets remain unmatched in size by the largest regional markets or even by entire continents. again using United States data for foreign affiliates in manufacturing. they seek not only cost reductions and bigger market shares. Still. For example. needed to attract a $500 million investment project by IV. 113 .108). but also access to technology and innovatory capacity. p. including trading affiliates. they are “created assets. while not decisive. 106). Perhaps more telling are data for United States foreign affiliates in the European Union. trade barriers and non-tradable services are still at work. (These figures are higher in the services sector. there has been an explosion of FDI in the services sector as a result of the general trend towards the liberalization of FDI frameworks for services. as the evolving policy framework there is more indicative of the FDI policy framework emerging globally: sales to local markets in that region declined from 76 per cent to 64 per cent between 1966 and 1993. and lower in manufacturing but they do not change the overall outcome. are typically people-made. the relative importance of different locational determinants for competitiveness-enhancing FDI is shifting. These resources. as well as goods that are perishable or need to be adapted to consumer preferences or local standards. and the corresponding locational attractiveness of host countries. and the combined markets of the 14 Central and Eastern European countries are smaller than the market of Brazil. p. Compared to natural resources. 1996a. and the TRIMs and TRIPS Agreements. Source: UNCTAD. These continue to generate import-substituting FDI and discourage efficiencyseeking FDI. these new types of resources can be created by host countries and influenced by governments. the market-seeking motivation. Box IV. are also expected. remain as strong as ever. has been able to create the conditions and resources. The result is that countries that do not possess natural resources can still attract FDI by creating assets that are in demand by TNCs. they continue to remain in force in several (especially developing) countries and in some industries in a much wider group of countries. pp. computer and data-processing services) in which domestic sales declined from 85 to 81 per cent over the same period (UNCTAD.” Possessing such assets is central for firms’ competitiveness in a globalizing economy (box IV.7). the market of the European Union during most of its existence has been smaller than the United States market. A similar trend can be observed in tradable services (e. For example. especially complex strategies.6. Costa Rica. 106). Various business facilitation measures.g. the traditional economic determinants related to large markets. In fact. which could do nothing to attract copper-seeking FDI. Data on the distribution of sales of foreign affiliates of United States TNCs in host countries are indicative in this regard: two-thirds of TNC activity is still of this type (UNCTAD. the market of the African continent (without South Africa) is smaller than that of the Republic of Korea. The implications of this for locational determinants go well beyond merely increasing the number of corporate functions that countries may try to attract. 1996a. while exports increased from 24 per cent to 36 per cent (UNCTAD. 1996a. though it is still true that these affiliates are predominantly oriented towards domestic markets: their domestic sales have dropped from 64 per cent in 1982 to 60 per cent in 1993. 107 . But the key is the shift of importance among the economic determinants of FDI location. The continuing relevance of traditional determinants Although the most profound shifts among FDI determinants result from integrated international strategies. as distinct from natural resources. In non-tradable services. For example. As regards trade barriers. including skilled labour. although FDI remains strongly driven by its traditional determinants. even though the general trend has been towards the reduction or even abolition of tariffs and quotas. and account for a large share of worldwide FDI flows.Chapter IV Settlement of Disputes between States and Nationals.6. When firms undertake competitiveness-enhancing FDI.

60-61. TNCs assign a particularly important role to obtaining access to created (or strategic) assets: the principal wealth-creating assets and a key source of competitiveness for firms (Dunning. were largely national. advertising. design. TNCs not only benefit from them but may also contribute to their further development. as in the case of the Swiss watch industry. 1998a. • 114 . 1997). Apart from created assets. The reason for this is that new clusters are often geared more towards external economies that help to upgrade the competitive advantage of the participating firms. pp. TNCs seeking created assets in knowledge-intensive industries may gravitate to spatial clusters of related activities or specialized support services within a country or a region. this type of project is unlikely to be relocated with as much ease as projects relying on a single type of easily available resource like low-cost unskilled labour. Infrastructure facilities. The result is that TNCs have taken advantage of these opportunities and used FDI as a major means of acquiring created assets and enhancing corporate competitiveness. Source : UNCTAD.Tr World Investment Report 1998: Trends and Determinants the INTEL Corporation. competencies (e. to organize income-generating assets productively). Created assets In their quest for competitiveness. While older clusters. or intangible.g.g. ranging from simple products such as cereals through books and computers to automobiles.7. Box IV. often as flagship firms (Dunning. R&D activities leading to new products and processes are costly and risky. Such facilities include high-quality telecommunication links and reliable transportation systems. interactive learning and face-to-face discussions. the rest relates to the contributions of various created assets. goodwill and brainpower. 47. the new clusters such as science and technology parks. consists of the costs of such created assets as R&D. At the same time. firms have to be present in locations where such clusters exist. Mytelka. international competition increasingly takes place through new products and processes and these are often knowledge-based. and Stewart. R&D consortia and service-support centres are characterized by a strong involvement of TNCs. To benefit from these externalities. but they have a common denominator: knowledge. 1998c. They include skills. p. Created assets can be tangible like the stock of financial and physical assets such as the communication infrastructure or marketing networks. such as knowledge creation and the exchange of uncodifiable knowledge. relationships (such as interpersonal relationships forged by individuals or contacts with governments). distribution and legal work. attitudes to wealth creation and business culture). Moreover. markets for knowledge-based resources and assets are becoming more open and enterprises embodying these assets can be bought and sold. p. A large proportion of the costs of many final goods and services. especially for foreign IV. These assets can be embodied in both individuals and firms and they can sometimes be enhanced by clusters of firms and economic activities. Moreover. trade marks. as well as the stock of information. other host country determinants relevant for competitiveness-enhancing FDI are: • Agglomeration economies. 1987. innovatory. 58). Less than 10 per cent of the production cost of automobiles now consists of labour costs. attitudes (e. The list of intangible assets is long. 1993a. capabilities (technological. The importance of created intangible assets in production and other economic activities has increased considerably. An indispensable condition for complex integration strategies is the ability to link specialized affiliates in mutually supporting networks of activities through adequate infrastructure facilities. managerial and learning capabilities). Once present.7.

low-cost labour and engineering skills. the range of resources sought in host countries is wide and cuts across the entire value-added chain. Although successive rounds of multilateral trade liberalization have decreased the relevance of market access through FDI for many products. In particular. • A broad range of resources. Locations that seek to attract a wide range of valueadded TNC activities need to be able to provide a correspondingly wide range of resources. Countries that cannot provide a broad range of resources may still be able to attract specialized FDI. Complex integration strategies are thus an extension of earlier strategies that were limited to one type of resource (e. perishable goods.g. however. labour-intensive processes): the entire value-added chain is now subject to cross-border vertical integration. however.they may need to be created and nurtured. Typically. As potentially all parts of the production process and activities of a firm can be assigned to specialized foreign affiliates.g. legal services. as long as they are embedded in the appropriate national policy framework. they also exist in developing countries and in economies in transition. The challenge is precisely to develop a well-calibrated -. and products requiring extensive after-sales service. because complex integration strategies make it possible to match specific locational advantage with the needs of a single functional activity that requires specific types of skills. a valley or a science park. products in which competitiveness demands a quick response to changing consumer preferences. Markets. in two ways: • Locational advantages do not necessarily arise spontaneously -. Specialized resources . It is important to emphasize. natural resources) or one type of process (e. a workforce with technological sophistication and adaptability). and finance and R&D capabilities. such as access to new markets.g. purchasing and marketing.Chapter IV affiliates that are part of “just-in-time” production systems and for regional headquarters. but also functions like accountancy. it continues to be important for non-tradable services. products or technologies.combination of the principal determinants of FDI location in a liberalizing and globalizing world economy and to seek to match it with the strategies pursued by competitiveness-enhancing TNCs. policies aimed at strengthening innovation systems 115 . Resources including created assets and infrastructure have to be available at internationally competitive prices. • • • While many of the principal locational requirements needed to attract competitivenessenhancing FDI can be found in developed countries. Large markets are important for complex integration strategies based on scale and scope economies. that it is not an entire country that needs to meet these requirements. it can also be a subregion. although pricing may matter less in the case of specific assets that enhance competitiveness in non-cost-related areas. Production in a market may also be desirable if the costs of production are subject to wide fluctuation derived from exchange-rate changes. such specialized resources have to be of high quality (e. Competitive pricing of resources and infrastructure. It includes not only inputs like natural resources. products that are not globally standardized and require local customization.and preferably unique -. National policies have an important role to play in this respect. a municipality.

B. commenting that “going to Europe gives us a way to hire people who bring new talents and new perspectives to our work that we couldn’t get any other way”. created assets (like the principal locational determinants in general) are also beneficial to national firms and facilitate their growth and competitiveness. Under competitive pressures. for example. New York Times . In turn. foreign semiconductor or computer firms have established research facilities in California. Most of these are concentrated in developed economies and this is where most R&D still takes place.8. 1998c.7 (Dunning. 51). One study has found that. Important also are all other policies that encourage the strengthening of created assets and the development of clusters based on them. 11 per cent of United States registered patents of the world's largest firms were generated by research undertaken in countries outside the home country of the parent company (Cantwell and Harding.8) is an encouraging sign in this respect. India is one example of a district featuring a large number of government and statesupported research institutes. has established a research laboratory in the United Kingdom. FDI in R&D operations is attracted to locations that feature particular kinds of intellectual resources.8. 1996). Knowledge-seeking FDI in R&D operations IV. 18 June 1997. That firms from developing countries are increasingly participating in cross-border R&D partnerships with firms from developed countries (chapter I. • Equally. a United States TNC. more visibly.Tr World Investment Report 1998: Trends and Determinants and encouraging the diffusion of technology are central here. be it on their own or in partnership with foreign firms in the interest of national growth and development. for example. When Texas Instruments decided to invest in the area in 1986. these were initially centred on the aeronautics industries of Karnataka State. The Government of India and its Department of Electronics responded by establishing software technology parks. p. resulting in a virtuous R&D cycle (Lateef. expenditure on R&D undertaken by foreign affiliates in the United States has been growing disproportionately faster than the size of their operations: between 1985 and 1995.5 and employment by 1. as these underpin the ability to create assets. the exchange of information that takes place among technical staff concentrated in a given location and. a “Microsoft picks England as site of research lab”. between 1991 and 1995. R&D has been a corporate function typically carried out in home countries. research centres or science and technology parks have also become host to industries intent on using high-tech inputs. Bangalore. The reasons for conducting R&D abroad include both the need to create new core products and processes and the need to acquire knowledge necessary to advance the productivity of domestic R&D (Dunning. as well as a Department of Electronics to target software development. a Similarly. Box IV. the availability of a large number of computer-literate technicians and researchers as well as of research centres were decisive variables. 1998b). specialized university or other research laboratories. Developing countries that have built up specialized training facilities. 116 . quoted in Dunning. if not more importantly. R&D is increasingly undertaken abroad. The resources include technically sophisticated workers. India has also established institutes of technology. pp. see also box IV. Source : UNCTAD. 1998b). found that firms located R&D in countries that specialized in their products’ production so as to have access to knowledge in the host country’s centres of excellence and to benefit from localized spillovers (Fors and Zejan. Microsoft. 1997. as well as policies that stimulate partnering and networking among domestic and foreign firms. while foreign pharmaceutical and chemical firms have settled in New Jersey in order to tap industry-specific knowledge networks available in these locations. which are educational institutions designed to provide technical skills. the work of Texas Instruments drew in other computer-technology TNCs. 1997. For example. A study of Swedish firms. while sales increased by 2. 13-16).4. In 1994. it grew by a factor of 3. based on the studies cited. 1996). some 90 per cent of research by foreign affiliates of United States TNCs was conducted in developed countries (Mataloni and Fahim-Nader.

with the rapid proliferation of BITs in the 1990s. showed that variables such as market size and growth. BITs are also concluded between developed or developing countries on the one side and economies in transition on the other. 1. regional. The impact of international policy frameworks In their efforts to attract FDI and to influence its quality. A comprehensive recent statistical analysis (UNCTAD. if any. with a view to promoting investment between the treaty partners. so there are examples of countries with large FDI flows and few. In this manner. it would be unreasonable to expect that any improvements in the investment climate brought about by BITs. if so. and a cross-sectional analysis of 133 countries investigating the relationship between total FDI flows and stocks and the number of BITs and other independent economic variables. they are also being concluded between developing countries. Increasingly. as compared to a period when such treaties were still comparatively 117 . the distinctive influence of BITs as a signal to attract additional investment may have been eroded. BITs exert some influence on the policy framework for FDI. 1996a. exchange rates and country risk are more important than BITs as FDI determinants. 25 They do so. could exert a significant impact on FDI flows. Both an analysis of time-series data on bilateral FDI flows in relation to 200 BITs. they help to reduce the risk of investing in countries party to these treaties.bilateral. BITs do not alter the economic determinants of FDI and they seldom provide for proactive promotion measures by governments (UNCTAD.Chapter IV D. there are also examples of countries that have concluded many BITs but have attracted only modest amounts of FDI.500 treaties in existence at the end of 1997 date from the 1990s. At best.3). Conversely. Since FDI flows are determined by a variety of factors. which relate only to parts of the FDI policy framework. Moreover. by strengthening the bilateral standards of protection and treatment of foreign investors and establishing mechanisms for dispute settlement (box IV. forthcoming b) confirmed the relative insignificance of BITs in determining FDI. plurilateral and multilateral -. Even such important economic determinants as large and growing markets or an abundant labour force do not work alone as FDI determinants. forthcoming b). A number of these instruments may influence some of the FDI determinants and thus exert an impact on FDI flows. in particular. whether they can also influence FDI flows. This section discusses the extent to which the most important of the existing or potential agreements -. Bilateral investment treaties Bilateral investment treaties (BITs) were originally concluded between developed and developing countries. BITs. either alone or together with other determinants. BITs play a minor and secondary role in influencing FDI flows and explaining differences in their size among countries.do indeed affect FDI determinants and. just as there are cases of countries receiving substantial FDI flows without putting business facilitation measures into place. The number of these treaties increased significantly in the 1990s: about three-quarters of the over 1. by contributing to the improvement of an investment climate. but only in tandem with other factors. 1996b). And. countries increasingly conclude international agreements dealing with an expanding set of issues (UNCTAD.

None of this means that BITs do not support the existing level of investment or prevent it from declining. In addition. Similarly. There is some evidence that foreign investors encourage governments of home countries to conclude BITs with host countries in which they already have FDI. namely. that they are enabling in character: by themselves. precisely because they have been implemented more strictly than their predecessors. MERCOSUR and earlier the European Union. BITs are increasingly regarded by foreign investors as a standard feature of the institutional structure introduced in the past decade. retain high tariffs for certain products or keep low environmental standards.28 In general. the speed with which a member country implements RIF provisions -. such exemptions can also influence FDI determinants. especially those related to policy and economic conditions. A deeper RIF that also allows for the movement of capital (including FDI) would be expected to have effects on the investment determinants of TNCs beyond those induced by trade liberalization or growth alone.also influences the countryspecific impact of the RIF on FDI determinants.Tr World Investment Report 1998: Trends and Determinants rare. Furthermore. the analysis mentioned above focused on the impact on FDI growth. If member countries choose to be exempted from RIF provisions and continue to restrict access to certain industries. First and foremost is the scope and depth of the integration envisaged by a RIF. a shallow RIF that entails no more than tariff reductions among members and external tariffs on non-members can have an impact on FDI determinants through trade or strategic responses to competitors (static effects) and growth (dynamic effects). 118 . in specific circumstances. They also place in doubt the member countries’ commitment to adhere to a given RIF. 29 More recent RIFs. the influence of the RIF on FDI determinants can work through more channels. the importance of business facilitation also rises. The credibility of RIFs. At the one extreme. BITs may matter as a protective device for small projects. 2. Failure to implement RIFs fully means that their impact on FDI determinants cannot be pronounced. Regional integration frameworks The impact of regional integration frameworks (RIFs) 27 -. Indeed. they have little or no effect. This is in line with earlier conclusions concerning policy determinants. because they have to be complemented by economic determinants and. such as NAFTA. have exerted greater influence on FDI determinants. abolishing tariffs -. Finally. manifested in the extent to which RIF provisions are actually implemented. as illustrated by the failure of numerous RIFs in the 1960s and 1970s to exert any discernible influence on TNCs. even if the amounts involved are too small to affect the total or even bilateral flows of the host countries investigated in these analyses. even if they are temporary. while it may be quite reasonable to expect the impact of a BIT on FDI flows to occur soon after its conclusion (as most of these analyses do).which range from free-trade areas to complete economic integration -. is another factor determining the impact of RIFs on FDI determinants. as regulatory FDI frameworks become more harmonized within a region. more importance is attached by TNCs to economic determinants in deciding their precise location. To a lesser extent. it cannot be ruled out that an impact may only occur many years later.for example. can be helped by investment facilitation measures. which determines the extent of policy harmonization and varies by type of RIF. undertaken by small and medium-sized enterprises.26 This may well happen if important locational determinants of FDI are not yet in place in a host or home country.on FDI determinants depends on a variety of factors. as a region becomes more integrated as the result of a RIF.

For most RIFs that involve developing countries. are harmonized. MERCOSUR and the revised Andean Pact. The Free Trade Agreement between the United States and Canada (1989). the pre-existing FDI framework is typically not open to the same degree for all members. even if no provisions on the movement of other factors of production are included.30 In the case of customs unions. a common external tariff vis-à-vis the rest of the world is also adopted. for example. The Free Trade Agreement meant that cross-penetration of markets through FDI was not especially required and this was evident in a decline in Canadian outward FDI to the United States (Blomström and Kokko. the principal influence of a RIF on FDI determinants would depend on how they address divergences in domestic policy. the pre-existing. For countries that have already established significant links. either through multilateral rounds of tariff reduction or through sectoral agreements like the Canada-United States Auto Pact (Blomström and Kokko. and policies including those affecting FDI. In choosing where to invest. Regardless of the depth of integration prior to the introduction of a RIF. particularly FDI capital. For example. by the levels of trade and FDI barriers. For most recent RIFs among developed countries (e. In the case of tradable goods and services. other determinants come to play a much more important role in the locational decisions of TNCs.32 Not addressing the movement of capital explicitly in the RIF does not therefore necessarily detract from its impact on economic and business facilitation determinants. 1997. RIFs can have a direct impact on the host countries’ policy frameworks for FDI. 1997. largely open. In terms of the depth and scope of integration. NAFTA further opened Mexico’s service sector to FDI. the movement of factors of production. the United Kingdom has been one of the most successful countries in the European 119 . 15-17). A distinction needs to be drawn here between RIFs confined to developed countries and those involving developing countries. FDI framework 31 remains in effect after the implementation of the RIF. TNCs interested in investing in a region will still have to choose where to locate among member countries. p. with the restrictions often reflecting the level of development and structural characteristics of their economies. had very little impact on FDI flows to Canada. pp. is often not addressed explicitly. but in terms of the regional market. in addition to their impacts on other categories of FDI determinants. for example. In these cases. while region-specific location advantages may increase (see discussion below). for example. 17). Therefore. in the case of NAFTA. Being a member of a RIF implies that some country-specific location advantages may decrease in importance as FDI determinants. market size is often redefined not in terms of the market of the member country that a TNC considers a potential location.g. Since the same definition of market size would apply to all RIF member countries. For example.Chapter IV A third factor is the prior interdependence of member countries and the established linkages among them. partly because bilateral trade between the two countries had already been considerably liberalized prior to the Agreement. or among locations within a member country. FDI provisions are included explicitly on both the inward and the outward side. TNCs consider region-wide factors together with factors that apply only to individual countries or to locations within countries. The locations most successful in attracting FDI are likely to be those that provide the best opportunities for TNCs to exploit both country-specific and region-specific advantages. as indicated. In the case of free trade areas. the case of the enlargement of the European Union). most of the recent RIFs cover the middle ground: links among members are strengthened principally by reducing or abolishing tariff and non-tariff barriers.

may be the least important for developed countries and most developing countries as far as inward FDI is concerned. 1998). and the factors pertaining to the facilitation of business. For small countries. namely. may not necessarily contain explicit FDI policy provisions (Brewer and Young. including provisions regarding the movement of capital.34 Of these conditions. at least partially open FDI policies have typically been in place prior to the implementation of a RIF. notably trade policy. Even RIFs postulating a high degree of integration among members. adopted the Code of Liberalisation of Capital Movements in 1961. Other policy provisions contained in RIFs.for example. though capital-movement liberalization did not accelerate until after the mid-1970s. Mexico has benefited from the same consideration in the framework of NAFTA. The overall impact of RIFs on the policy framework for FDI therefore depends on whether a RIF contains provisions liberalizing the movement of capital (including FDI capital). especially those relevant to trade liberalization. Trade liberalization and trade policy coordination among RIF members 120 . as the example of Mexico prior to joining NAFTA illustrates. The discussion that follows looks at the ways in which RIFs influence each of the three categories of FDI determinants. membership in RIFs will enhance their location-specific advantages. For some countries. regional The impact of regional integration frameworks on FDI determinants (i) The policy framework As mentioned earlier. the majority of RIFs do not explicitly address FDI policy. It follows from the discussion above that. because inward investment regimes are typically open even prior to the implementation of RIFs. the size of the domestic market of large countries will no longer be as attractive and. For the same reason.Tr World Investment Report 1998: Trends and Determinants Union in terms of attracting FDI because its locational advantages combine access to its own locational advantages with access to the wider European Union market. So the direct impact of explicit FDI provisions contained in RIFs on FDI policy determinants is likely to be small in many instances. In the overwhelming majority of RIFs. and not just the host country market. Even in many developing countries. Economic determinants specific to individual member countries or business facilitation at the local level can thus become important. the central elements and the most important factors influencing marketseeking FDI are the liberalization of trade barriers and the granting of preferential market access to members. even if RIFs have a positive impact on FDI determinants for the region as a whole. on how restrictive the capital movement and investment regimes of the member countries had been prior to the implementation of the RIF. 33 although there is an increasing tendency for free trade agreements to include investment. the policy framework for FDI. will become less of a bargaining asset for host country governments. most-favoured-nation treatment. rules of origin. The OECD member countries. unless they result in a considerable liberalization of investment regimes. performance requirements. the set of economic determinants. a. are likely to be more important in determining FDI. therefore. for example. dispute settlement -. not all member countries necessarily benefit to the same extent. the size of their domestic market will no longer deter market-seeking foreign investors in tradables since they will now have access to the region’s market. and on other policyliberalization provisions contained in the RIFs. on national treatment. whether or not a RIF contains explicit FDI provisions -.

for example. as a means of reducing the share of the public sector in their economies. In the European Union not all countries were ready to deregulate their financial services at the same time. or to liberalize it if is restrictive. social expenditures. In some cases. or their harmonization. The “social charter” of the European Union. to lock in liberalizing changes. even though the liberalization of services and parts of the primary sector accelerated only after Mexico became a signatory. The removal of non-tariff barriers. Apart from trade liberalization. to increase momentum to liberalize further. usually with foreign-investor participation. they will not have a major impact on FDI policy determinants from the point of view of individual countries. trade discrimination against non-members in the form of tariff barriers makes the size of a regional market more appealing and encourages market-seeking FDI by TNCs not present in the region.Chapter IV contribute to a policy framework conducive to FDI because they create favourable conditions for foreign affiliates within the region to access regional markets for final and intermediate products. to harmonize policies.g. Dynamic effects of RIFs in encouraging higher rates of economic growth can help boost inward FDI. RIFs can reaffirm their members’ commitments to adhere to liberal policies and bring about a momentum to continue the liberalization process in both FDI and trade. however. the harmonization of related policies among members can also play a role as FDI determinant. 35 For example. also exerts a positive influence on market-seeking FDI. Their contribution to FDI policy determinants lies in ensuring member countries’ commitment to adhere to a liberal existing policy framework. RIFs may also influence the speed of FDI (and trade) policy liberalization. member countries that are ready to deregulate a particular industry (e. prompted Mexico to liberalize its FDI framework even before the Agreement was signed. The prospective NAFTA Agreement. for example. To put it differently: unless RIFs substantially alter national FDI policy frameworks. to strengthen standards of treatment and protection. the size of the market is redefined 121 . Likewise.g. competition policy). European Union environmental regulations seeks to ensure that FDI would not be diverted to members with lax environmental regimes. Even if (as is often the case) pressures to liberalize do not apply to FDI policies per se. Such policy harmonization can act as a brake on a “race to the bottom” in competitive policy liberalization meant to attract FDI. RIF members may be encouraged to privatize. seeks to ensure that working conditions. and to encourage policies that ensure the proper functioning of markets (e. More generally. wages. and a tier system was introduced to resolve that. financial services in the case of the European Union) may be obliged to wait until the other members of the RIF have reached a similar point. Most importantly. (ii) Economic determinants Market size and growth are the FDI economic determinants that are most affected by the implementation of a RIF. Finally. would not differ substantially among members and thus give “unfair” location-specific advantages to some member countries. In the case of customs unions and free-trade areas. But the reverse may also take place: countries that are lagging behind in terms of deregulation of industries and liberalization of policies may be pressured to move faster by other RIF members. etc. They also allow TNCs to establish regionally integrated production networks to enhance their efficiency. they can affect the overall policy framework of a member country in a manner that encourages FDI.

as firms previously serving the regional market through exports seek to become “insiders” and switch to FDI. the accessibility of a region’s market from a given location becomes an important FDI locational determinant. such as benefiting from rules-of-origin regulations (Eden and Appel Molot. cannot be discounted. However. A survey of TNCs about the importance of different factors in attracting FDI into the United Kingdom conducted by the Department for Enterprise concluded that access to European Union markets was an important factor but access to the United Kingdom’s market was more significant for all types of FDI (Bachtler and Clement. 1990). Increased market size -. for both market-seeking and efficiency-seeking TNCs. So accessing an individual member country’s market. say. In addition. The importance of infrastructure as an FDI determinant is therefore enhanced considerably when a RIF comes into effect. This is exemplified by United States FDI in the European Union. All this is made possible by the removal of intraregional trade barriers within the region. In addition to abolishing customs-clearance procedures that help speed up border crossings. as would the importance of proximity to local consumers. linguistic and other less obvious barriers to doing business would remain (Motta and Norman. even if all trade and investment barriers between countries were removed.is in itself an efficiency-inducing determinant because it provides the demand dimension that gives rise to the possibility of exploiting economies of scale and scope in 122 . the regional market may still be an attractive location as long as the RIF eliminates obstacles beyond tariff barriers or facilitates business transactions. 1996). through a common external tariff. good physical infrastructure.from national to regional or global -. facilitates access to regional markets. there may be advantages associated with becoming an “insider” in a regional area. especially in transport and communications.36 With the implementation of a RIF. As the importance of market size as an FDI determinant becomes more uniform for all countries that are members of a RIF and as the removal of cross-border barriers within the region increases competitive pressures. the location advantage of a large regional market may not be what it used to be. and whether TNCs had already invested in the national markets prior to the RIF. In a liberalizing world of falling barriers. 1993). unless the RIF also dictates some protection. The extent to which this takes place depends on how heavily protected the host (regional) market becomes after the implementation of a RIF. All this means that regional integration frameworks increase the geographical scope and size of “effective” markets because they increase the ease of access within member markets through the removal of trade and other barriers. which carries the implication that a single host country’s market size is no longer as significant a determinant of market-seeking FDI as it used to be before the implementation of the RIF. A part of United States affiliate sales in the European Union are geared to the regional market: their sales in the European Union in countries other than the host country itself accounted for 31 per cent of their total sales in 1995. determinants related to enhancing efficiency come to play a bigger role for all types of FDI. The possibility of accessing a market wider than that of a single country for tradable goods and services becomes an inducement to invest in the region.Tr World Investment Report 1998: Trends and Determinants under a RIF as the size of the region’s market. This can induce at least some import-substituting (tariff-jumping) FDI. The redefinition of market size from national to at least regional is encouraged if a common external tariff is imposed. cultural. even in the absence of a common external tariff. although less significant as an FDI determinant under a RIF. Of course.

need not necessarily require that a TNC invests in the same country where these companies or facilities are physically located. In sum. RIFs help to create both the demand conditions and the production conditions needed to improve efficiency in production. and differences in business support measures. which may mitigate the importance of the skill-seeking motive for FDI within the region. Proximity to a cluster of companies producing similar products or having similar R&D facilities. Finally. TNCs can access the skills. About one-quarter of Japanese manufacturing affiliates in Western Europe established during the mid-1990s were established through acquisitions. 1991. the removal of internal tariff barriers was not 123 . for example. technologies or other strategic assets available in member countries other than those in which their production operations are located. Furthermore. but more concentrated in terms of geographical space. a greater concentration of FDI in a few supranational clusters may develop that allows FDI to be more dispersed in terms of country distribution. RIFs allow such TNCs to locate each value-added activity of the production process in the most cost-efficient location within the region in order to rationalize operations regionally by taking advantage of productivity-adjusted cost differences in labour. asymmetries in doing business in different countries. the heterogeneity of administrative procedures. It may very well invest in a bordering country in close physical proximity to the cluster of companies or R&D facilities. Dunning. (iii) Business facilitation The primary effect of RIFs on business facilitation FDI determinants is to reduce intraregional business transaction costs. some labour moves across borders in response to TNC employment opportunities. RIFs give foreign investors the opportunity to be close to clusters of companies producing similar products or having similar R&D facilities and thus to exploit regional as well as sub-national agglomeration economies and obtain access to created assets. and other resources (UNCTAD. allows all foreign affiliates regardless of their location within the Union to participate in European Union-sponsored R&D projects -. The European Union.37 Thus within regions. In the case of the European Union. 1993a. Recognizing the importance of business facilitation obstacles. 1993). compared to 10 per cent of those established in 1990 (JETRO. Such costs arise directly from inadequacies of information. for example. 1991.subject to certain restrictions on the transfer of technology to non-member countries (Brewer and Young. especially if arm’s-length competition through trade is hindered by a common external tariff. Robson. Increases in intraregional and extraregional crossborder acquisitions designed to access resources or defend competitive positions often accompany RIFs. some RIFs seek to harmonize efforts to remove them or replace them with comprehensive region-wide programmes for FDI facilitation. for example. 1993a). technology. cost considerations are especially important for efficiency-seeking TNCs (Burgenmeier and Mucchielli. 1998). RIFs also influence TNCs’ access to resources. one of the primary advantages of enlarged markets under RIFs is that they create the demand conditions that allow TNCs to reap economies of scale and scope in all parts of the value chain. RIFs promote greater competition to capture expanded markets or increase market shares within the region. On the production side. Indeed. Firms may respond to the increased competition for markets by establishing a physical presence. In many RIFs.Chapter IV production and distribution. When RIFs allow the movement of labour. 1996).

Tr World Investment Report 1998: Trends and Determinants sufficient for creating a unified regional market because of other obstacles to intraregional transactions. Measures aimed at targeting specific investors. such as certain macroeconomic changes. and removed about 90 per cent of them in 1993 as part of the single market programme (Yamazawa. Dynamic effects of RIFs on FDI deriving from increased growth rates or heightened competition are much more difficult to assess. Accessing the EEC market in the presence of nontariff barriers seems to have been the principal motivation of this wave of FDI (Dunning. providing social amenities and marketing a country as an investment location usually fall outside the scope of RIFs. Between 1957 and 1972. foreign affiliates as well as European Union firms. NAFTA (RIF among developed-developing countries) and MERCOSUR (RIF among developing countries). the share of the EEC (6 members) in the outward stock of the United States increased from 7 per cent to 17 per cent. APEC has a comprehensive programme to facilitate trade and FDI whose objectives include “smart card” visas for shortterm travel. and policy coordination and harmonization gives rise to a more level playing field. Prior to 1985 (when the Single Market Programme was initiated). increasingly. members of the European Economic Community (EEC) received increased FDI inflows mostly from outsiders (Dunning.2). especially in services. 1993) and particularly from the United States (table IV. as corporate adjustment and efficiency considerations by “insiders”. In fact. The 1992 Single Market Programme had not only a positive quantitative impact on FDI inflows but also a qualitative one. there still remain important differences among members that allow them to compete for FDI. the Single Market Programme led to substantial intraEuropean-Union FDI flows as firms sought to acquire market positions within the new 124 . 38 This section examines three cases of RIFs: the European Union (RIF among developed countries). This is because FDI determinants work together under RIFs as well as in combination with factors unrelated to RIFs. in the sense that it describes the one-time impact of RIFs on FDI. One result is precisely a proliferation of incentives used to attract FDI (UNCTAD.and. Since RIFs allow a region’s market or many of its resources to be more easily accessible by TNCs from any location within the regional bloc. 1997). and can therefore be used by each RIF member to enhance location-specific advantages. 1997). business facilitation factors become increasingly important. Furthermore. although market access continued to be important in services. b. as they concern matters which individual member countries -. and minimum restrictions on arrival in a member country (Yamazawa. 1997. The evidence presented here relates to the overall impact of RIFs on FDI flows or stocks. Even if some business facilitation measures are harmonized across members. 1995a). procedures for APEC-wide accreditation of standards. The European Economic Community identified 280 barriers to cross-border transactions in 1985. sub-national authorities -. the evidence presented below is largely static. took precedence over market-access considerations in the manufacturing sector.can address to distinguish themselves from one another when competing for FDI. Only inferences can be made about the extent to which a particular determinant is responsible for that impact. regional The impact of regional integration frameworks on FDI flows From aggregate FDI data it is difficult to determine the impact of individual FDI determinants on investment flows or stocks received by a region or by specific member countries within a RIF. UNCTC. 1997).

At the country level. In the years immediately before NAFTA. FDI/TNC database.1 1957 6. policy liberalization and lower wages.0 1967 14. 1993).4 1972 17. and the availability of lowcost labour all led to substantially higher FDI inflows into Mexico. able IV. (The investment boom in the United States in the aftermath of NAFTA is largely unrelated to NAFTA. Spain and Portugal benefited greatly from EEC membership. a skilled workforce and advanced business facilitation measures. despite the peso crisis. good infrastructure. with a stable macroeconomic environment.1 UNCTAD. FDI inflows to Mexico doubled to over $4 billion annually and in the years following NAFTA they increased even more.3). FDI/TNC database. 1983-1992 (Percentages) Country Denmark France Belgium-Luxembourg Ireland Netherlands Italy United Kingdom Germany Source: UNCTAD. induced by access to the regional market.Chapter IV framework (UNCTC. United States TNCs did not rush to invest in the European Union to the same extent as Japanese firms. it was in Mexico that NAFTA had a noticeable impact. Gro inward flows. however. Share of the EEC (6) in United States' outwar d FDI stoc k (Percentages) 1950 5. policy 125 . Ireland. outward stock Tab le IV. able IV. One exception was Japan: as a latecomer.) Mexico’s liberalization of FDI policy (locked in and reinforced by NAFTA provisions).2.4 Source : 1955 6. Tab le IV. proximity and guaranteed access to the United States market (as long as local content requirements were satisfied). did expand their capital expenditures (Lipsey. resources and efficiency). to over $10 billion in 1994. Gr o wth rates of inwar d FDI flo ws. FDI flows into Mexico in the context of NAFTA were governed by a combination of economic determinants (market size. 1990). experienced one of the faster growth rates in FDI among all European Union members between 1983 and 1992 (table IV. it invested heavily in the European Union in the late 1980s and early 1990s in both manufacturing and services. having established their desired investment positions earlier on. Per cent 37 33 27 27 22 14 14 5 While FDI flows to the NAFTA region increased immediately before and after its implementation.5 billion in 1995. Except in the case of services.3. United States foreign affiliates in services. falling slightly to $9. EEC (9) member countries.6 1962 10. In other words.2.3. with both countries receiving record FDI inflows in the years before and immediately following their accession.

It also suggests that governments may need to pursue active regional policies to see that the benefits of integration are shared throughout the region. the decision to implement privatization programmes had begun before the implementation of MERCOSUR. as in the case of NAFTA. functioning RIFs can enhance the location-specific FDI determinants of member countries. The impact has been the greatest when the changes in any of the categories of FDI determinants brought about by the RIF have been the most profound. the choice of the country in which a TNC invests still depends on its evaluation of the location-specific determinants that the country offers. In sum. On the other hand. Brazil. coupled with trade liberalization. and specific provisions at the sectoral level (Blomström and Kokko. it is difficult to attribute any FDI gains to the MERCOSUR framework alone (Blomström and Kokko. Within regions. It appears that RIFs have contributed positively. some of these determinants. what becomes important for FDI in tradable goods and services is its ability to provide good access to the region-wide market. in particular.the two countries that have benefited the most in terms of FDI flows -. to the growth of FDI into the recipient region in all the three cases discussed above. With the creation of RIFs. From the point of view of each member country. clusters) may see their locational attractiveness further enhanced. there are disparities in the distribution of investment among member countries (and among regions within countries). The availability of natural resources has also been a magnet for FDI. But. like market size or access to certain resources. In particular. FDI flows into MERCOSUR as a whole increased immediately before and after its implementation in 1995 ($10 billion in 1995 and $17 billion in 1996). RIF locations that have already attracted considerable investment (e. 1997). Conclusion Under RIFs. However. it is not obvious how far FDI gains have been the direct outcome of MERCOSUR. Macroeconomic reforms as well as trade and investment liberalization and.g. 1997). Paraguay and Uruguay (as well as to Bolivia and Chile.investment inflows have responded in part to non-RIF factors. Market-access considerations. low-wage locations in a RIF that rate well on the principal FDI determinants may be able to attract substantial FDI flows geared towards the larger market.Tr World Investment Report 1998: Trends and Determinants considerations ( the greater FDI protection awarded by NAFTA). Nevertheless. are now assessed from a regional rather than national perspective. but to a varying extent. In general. associate members since 1996). especially to privatization and the success of national macroeconomic reforms. Not being left behind in the harmonization process and establishing good infrastructure facilities 126 . This suggests that successful host countries are those that possess the right combination of location-specific advantages to match the ownership and internalization advantages of the firms that have decided to invest in the region. 1997). access to the regional market supersedes access to national markets as an important FDI determinant. This depends on how well it is integrated into the regional bloc in terms of policy harmonization as well as physical accessibility. MERCOSUR has helped to consolidate these changes. Especially in Argentina and Brazil -. and provisions to promote and protect FDI appear to have helped to attract investment (Blomström and Kokko. MERCOSUR provides access to a market of some 200 million people in Argentina. however.

assetaugmenting and asset-exploiting FDI can take advantage of location-specific immobile factors of production or resources within the region. acquires a new dimension in a regional context. Regional integration frameworks also allow TNCs to take advantage of a greater number of FDI determinants without having to trade one determinant against another. By offering after-investment services. with access to the region’s market already being assured by the RIF. RIFs can accelerate the process of trade and FDI liberalization. So. The existence of a greater variety of production inputs at a wider choice of prices means that TNCs can make better choices within regional blocs than in a single country alone. transparency and stability. Efficiency. they remain important FDI determinants. and not national growth. less frequently addressed by RIFs. Many of these resources are created assets that can be accessed through formal or informal links with supranational (or sub-national) clusters of companies or research facilities giving rise to agglomeration economies. This does not mean that national markets or growth no longer matter. For the region as a whole. social amenities and other business facilitation services to foreign investors. In the case of NAFTA. they give rise to more competition for FDI among member countries (or locations within countries). for example. but it does imply that their distinctiveness as countryspecific location advantages diminishes for the members of a regional arrangement. greater uniformity of trade and other policies that influence FDI means that TNCs can expect similar treatment across the region. also help to boost FDI. ensure its continuity. and reaffirm the protection of foreign investors. at the regional level. Sustained increases in growth rates. national governments or sub-national authorities can attempt to influence TNC location decisions. 127 . for example. In particular. On the policy front. especially for non-tradable services. RIFs can give policy determinants a boost in importance. it is the region’s growth that matters more. but they matter less. as opposed to determinants related to demand. Production-related FDI determinants. It is more likely under RIFs that firms will position themselves in such ways as to exploit first-mover advantages ahead of their competitors and that they will be more inclined to engage in cross-border strategic alliances. A number of proactive measures to facilitate international production can be carried out fairly rapidly by national governments. come to play a more important role in the competition for FDI. business facilitation factors. Access to enlarged markets. Such strategic responses to RIFs by TNCs can be expected to boost FDI in a regional bloc. The likelihood that FDI will be affected by reactions to “strategic” moves of other firms. On the one hand. one of the dynamic benefits of RIFs.Chapter IV therefore acquire greater prominence as national FDI determinants. too. foreign automobile manufacturers can still reap the benefits of lower costs in Mexico without losing access to the broader North American market. Under such conditions. also increases. The greater openness that exists within RIFs gives rise to more competition among firms. as national locational advantages become less distinct. can be achieved without having to sacrifice access to location-specific resources that help to enhance efficiency. domestic or foreign. on the other hand. Again. as firms try to position themselves in the best possible situation to benefit from a RIF. This does not mean that policy determinants are not important. this makes regions attractive locations. come to play a more important role in location decisions under RIFs.

including definitions. if such a framework were to be negotiated. although not the most significant category of FDI determinants. The potential impact of a possible multilateral framework on investment In recent years. including the possibility of plurilateral and multilateral frameworks (chapter III. One of the questions that has been raised in this context concerns the extent to which a possible multilateral framework on investment (MFI) would influence investment decisions and. UNCTAD. The challenge for RIF members (or sub-national locations) is to marry their own distinct locational advantages with the advantages that the region offers to create an environment that complements the ownership and internalization advantages of TNCs. discussions on international investment frameworks have intensified. This section does not deal with the advantages or disadvantages of an MFI. 3. The development of an MFI.and perhaps affect other features of such flows as well. scope and safeguards. Intraregional competition for FDI through business facilitation is thus not only likely to intensify but may also take place increasingly at the sub-national level. become more significant as they are among the few areas on the basis of which member countries (or locations within countries) can compete for FDI. and the extent to which a member country is able to tap into it in order to enhance its own location advantages.40 One conceivable outcome of an MFI is that it would help to increase FDI flows -. an MFI would underline the importance of economic (and business facilitation) factors in determining FDI flows. but with a hypothetical question: if there were an MFI. become more important for the location of FDI. Because an MFI is only a hypothesis. Business facilitation measures. Indeed.answers to this question are unavoidably tentative. RIFs diminish the ability of member countries to attract FDI on grounds of country-specific location advantages alone. by making FDI policies potentially more similar. how would it affect the volume and pattern of FDI flows? Since an MFI is only a hypothesis and not a reality -. including their ability to negotiate with foreign investors on the basis of such advantages.39 The discussion is thus at an abstract level and should be read with the understanding that the specific implications of each scenario would vary from country to country in accordance with specific economic and developmental conditions and specific national stances vis-à-vis FDI. Such an outcome is based in part on the assumption that a multilateral agreement would not only consolidate recent changes towards 128 . Although such a framework might also affect some elements of business facilitation (such as investment incentives). in particular.1). would represent a change in the policy-framework cluster of determinants (table IV. The precise effect of an MFI on the policy-framework cluster of determinants would depend on its content. as locations within member countries compete for FDI more fiercely than countries themselves. lead to higher FDI flows around the world. 1996a).and since there is little information about how TNCs would incorporate a variable such as an MFI into their locational decisions -. it would not involve significant and direct changes in the principal economic determinants. based on differing assumptions. The regional context. are discussed below for purely analytical purposes. three scenarios.Tr World Investment Report 1998: Trends and Determinants In conclusion.

the other FDI determinants that would come into play at that point. A second conceivable outcome of an MFI is that it could actually reduce the quantity and quality of FDI flows. the MFI that would result could conceivably enshrine a less liberal multilateral environment than has already evolved unilaterally or regionally. creating uncertainties about the investment climate worldwide and thereby discouraging foreign investors. for example. as far as the openness of economies to FDI.2). plurilateral or multilateral investment agreements. A third conceivable outcome of a possible MFI is that it would have little or no impact on the quantity and quality of FDI flows. during the 1980s and 1990s (chapter III. would provide protection for investors and could be easily extended to additional countries. One reason why this might be the result is that there has already been significant liberalization in many countries. a multilateral framework could facilitate investment by providing stronger assurances -. even if favourable to FDI. on this view. Even in the absence of further liberalization.when it comes to the protection of FDI and the stability of domestic FDI regimes. table III. Moreover. 129 . In particular. the extensive network of bilateral investment treaties. and this liberalization has contributed to a surge of FDI flows that reached a new record in 1997.requiring countries to commit themselves not to introduce new barriers to FDI. an MFI might reduce FDI flows to countries that gain from the currently restrictive policies of their competitors for such investment and increase flows to otherwise desirable locations that are receiving little inward FDI because of uncertainties about policies. This. predictability and transparency resulting from an MFI would create a generally more favourable climate for investors. and countries whose current policies. the nature of national commitments and exceptions to the generalized multilateral rules and.) Such an MFI could also alter the patterns of FDI flows across geographic regions and industries. *** On balance. as they are largely influenced by other FDI determinants. Finally. standstill provisions -. regional.would essentially maintain the status quo. of course. to the extent that it would contribute to greater security for investors and greater stability. At the same time. because the negotiation of an MFI would take several years. there would be no significant effects on the geographic patterns of FDI flows.would depend on the precise content of an agreement. their treatment of foreign affiliates and the functioning of their markets are concerned. as it would not materially alter the policy framework for FDI. whether or not FDI flows would actually increase -.as compared with unilateral or even bilateral measures -. the extent to which a formal binding of the regulatory framework at a less liberal level would affect FDI flows is unclear. these considerations suggest that an MFI would improve the enabling environment for FDI. even if negotiations did produce an agreement.500 by the end of 1997 (chapter III).and whether there would be a change in the quality and patterns of flows -. predictability and transparency in investment policies and rules. (However. The impact on inflows might be greatest for those countries that were not already signatories to bilateral. The presumably greater stability. Therefore. lower standards of investment treatment or measures likely to impair the proper functioning of markets -. are not considered sufficiently predictable by investors.Chapter IV more liberal policies by many countries but would incorporate "rollback" provisions -requiring countries to commit themselves to reducing or eliminating existing barriers to FDI and strengthening investment protection and the proper functioning of markets. an MFI that contains. which numbered over 1. in particular in many developing countries and countries in transition. Further.

In interviews with CEOs of TNCs conducted for a study on FDI in Brazil in spring 1996. Brazil. 147-148). equal access to short and long term borrowing will favour larger TNCs firms. and regard territories they do not know as risky.especially the possible role of such an agreement in providing a framework for intergovernmental cooperation in the area of investment (UNCTAD. leading to a drastic reduction of FDI inflows. three years after the reforms started. In general. 1996a. Expectations about the impact of an MFI on FDI flows (if it were indeed to be negotiated) in comparison to the current regulatory framework and the direction in which it is developing should. it introduced policies aimed at restoring macroeconomic stability and at re-attracting FDI. See United States. not be exaggerated. a lack of knowledge being strongly associated 130 . How much difference an MFI would make.also the ‘eclectic paradigm’. to assert their influence. For a discussion of the effects of the 1997/1998 currency devaluation in Asia on FDI. and the United States (Goldberg and Kolstad. 119-148 (and earlier articles in the same series). In the 1970s. therefore.41 Notes 1 2 3 4 5 6 7 8 9 10 The analytical framework on which this description is based is known as the ‘OLI (ownership. particularly to countries whose investment climates would newly reflect the multilateral framework. Department of Commerce. Estimates for Malaysia and Thailand (e. provides a good example. pp.for example. box III. the United Kingdom. Ramstetter. 1995a and 1995b) also suggest that exchange rate levels have not generally had a statistically significant effect on FDI in these countries.Tr World Investment Report 1998: Trends and Determinants in turn. always a potentially attractive host country because of its market size. could encourage higher FDI flows and potentially some redistribution of those flows. which were found insignificant as determinants of bilateral FDI flows among Canada. it took two to three years for FDI flows to take off again. 1997c. forthcoming a). 1997a) -. Interest rates were found to be a factor influencing flows of FDI from the European Union to the United States (chapter V). however. thereby reducing the imperfect nature of technology markets and thus affecting transaction costs. if no speical measures are put in place to facilitate loans to SMEs. As TNCs increasingly seek to hone their competitive advantages. degree of competition and other elements of ownership and internalization choices. pp. 1994). For example. it was clear that many CEOs were not yet convinced that the Brazilian reforms would hold (UNCTAD. of course. through the promotion of cross-border partnerships in R&D. that investors tend to favour what they know. quality and patterns of actual FDI flows is difficult to predict because as in the case of BITs.g. which is specifically focused on the determinants of FDI flows.but these fall outside the scope of the present analysis. internalization) paradigm’ -.12. see chapter III. 1993). and to begin to grow rapidly. There are. Germany. It is based on the premise. On the question of tax competition. In the early 1990s. changes in exchange rate levels are expected to have a greater impact on FDI than differences in exchange rate levels. as a result of the loss of macroeconomic stability. From the perspective of local SMEs. equality of conditions can create an imbalance that favours large foreign firms. forthcoming a. it is precisely the function of an enabling framework to allow other determinants. see chapter VII. Known in the FDI literature to be a factor influencing locational decisions (Johanson and WiedersheimPaul. Governments can influence the other two conditions but only indirectly -. Japan. While the stability was restored almost immediately. and especially economic determinants. location. confirmed by evidence. even within the same industry (UNCTAD. their strategies can become quite diverse. it was the largest recipient of FDI among developing countries. other issues that need to be considered in connection with a possible MFI -. in terms of the quantity. It lost this position to other countries in the 1980s.

such as Japan. However. The other point to note is that even productivity-adjusted wages are only one factor among others and their influence on any particular investment decision depends on the context of that decision. Characteristic in this regard is the following statement made recently by the head of CzechInvest. optimally. highlyskilled location in Europe” (CzechInvest. In addition. however. 1994. Therefore. many programmes are executed at the level of regions. the national investment promotion agency. Low wages are a positive determinant of FDI but only other things being equal. developing countries and economies in transition typically do not have pockets as deep as developed countries when it comes to financial incentives. pp. final consumer goods produced by foreign affiliates may be redirected to its own domestic market. on the occasion of introducing a new package of incentives in the Czech Republic: “Up until now the Czech Republic has been competing with Poland. This number does not include such countries as the United Kingdom and France. Promotional actions can contribute to reducing it further. as determined by the relevant policy framework. First. levels of education. It is being progressively reduced by modern tools of communication. generating a psychic distance between home and host countries. For a recent example. they take time (e.11. Among these are a study of manufacturing affiliates of United States TNCs in 1966 (Kravis and Lipsey. trade and travel. Other reasons for the less frequent use of performance requirements include the fact that the TRIMS agreement stipulates the phasing out of certain performance requirements that distort trade (e. 1982) and a study of FDI flows from 14 home countries to 45 host countries in 1990 and 1991 (Wei. studies of the determinants of location decisions taken by foreign firms in one and the same country are likely to be more useful for analyzing the relationship between wage levels and investment 131 . Psychic distance. including promotional offices abroad in large home countries. box IX. convergence has limits. Investment promotion activities. Second. if not well-grounded in a favourable investment environment. This package [of incentives] will enable the Czech Republic to compete on equal terms for prime mobile direct investment projects looking for a low-cost. see the programme of the Republic of Korea. known for strong promotional programmes. Hungary and Western European countries at a disadvantage. This type of investment is highly mobile because non-equity forms of FDI involve control but not ownership and this reduces the cost of closing down or abandoning foreign affiliates. which was established in 1995. may be counterproductive or even harmful if they create perceptions and expectations not in line with reality. levels of development. pp.4). Increasingly. For example. and the like. box VII. going back to the 1960s and forward to the mid-1990s have. is not constant. 1998) (see also chapter IX. Third. 291-292). including after-investment services as determinants of FDI. the size of the relevant market. even if carefully planned and well executed. What matters is not wage levels as such but these levels as adjusted for the productivity of labour inputs. for example. But after-investment (or aftercare) services can also be rendered with a view towards maximizing the FDI contribution to local economic development (Young and Hood. Hence. 1995a.g. both promotional actions and incentives cost money. However. culture. on the whole. chapter VII. there is a growing awareness that promotional programmes and incentives should be carefully tailored to the needs of individual host countries and not simply copied from the programmes of other countries (UNCTAD. become champions of reforms. 45 and 52). which could enable them to be the first to identify faulty policies and.Chapter IV 11 12 13 14 15 16 17 18 19 20 with the fear of negative possibilities. regions and large cities in Europe have similar programmes. political systems. which tend to focus on fiscal incentives (UNCTAD. It should be noted as well that daily contact with foreign investors resulting from rendering these services puts IPAs in a unique position. or states within countries.g. reducing corruption). as the host country develops and acquires higher standards of living. A number of econometric studies. 1997b). The discussion here focuses on business facilitation. export requirements). etc. perhaps these are even more numerous than national programmes. 1997a and 1997b). and some of them cost a lot of money. This lack of knowledge is deepened by differences in language. There is rather less here than meets the eye. failed to confirm the common-sense expectation that low wages would be an important factor in attracting FDI into a host country. virtually all of the states in the United States have such programmes. many of these activities are very difficult to carry out and. but not yet members of WAIPA.

the Treaty of Rome contained specific provisions on capital movements. as various locations may compete for the mobile assets that are required to produce them. 1998). 182). ASEAN members have adopted safeguards against nationalization and the provision of adequate compensation against expropriation. see also Lloyd. procedures for phasing out existing export-based and production-based performance requirements. chap. through transactions that promote greater interdependence and cohesion among economies. among members. Of course. forthcoming a. has liberalized the movement of capital among member countries (Brewer and Young. the Australia-New Zealand Closer Economic Relations Agreement covers trade in goods and services (including labour mobility). cost/quality ratios and available quota (Mytelka. For example. 1998. A RIF that allows the free movement of both labour and capital would also affect FDI determinants. by definition. Part Two. the firms in these zones are less likely to upgrade rapidly. There are also arrangements that are more partial in nature.the focus of this section -. but also through intra-firm transactions among members of their corporate networks. 1996a. To a certain extent this applies also to non-tradable services. and bans on new export-performance. In general. where the resource sought is unskilled labour. this did not always hold true. Article 73 of the Maastricht Treaty “grandfathered” existing FDI restrictions. In consequence. A good part of this type of investment has been located. In the textile and clothing industry quotas have been determined for many years by the Multi-Fibre Arrangement.are policy-led integration initiatives adopted by governments. that is. 1994). The Gulf Cooperation Council.Tr World Investment Report 1998: Trends and Determinants 21 22 23 24 25 26 27 28 29 30 31 32 33 flows than studies covering a variety of host countries. all of which are relevant policy determinants of FDI. For elaboration on. 1993a. 1991). see UNCTAD. since this reduced competitive pressures from imports while simultaneously allowing higher earnings (see Mytelka. p. but does not cover investment. however. Where these remained as enclaves and did not draw upon supplies from the local economy. Products in this industry were subcontracted on the basis of “market niche”. their contribution to the development of human capital is often limited and their vulnerability to price-and-productivity-based mobility is greater. In the case of the European Union. For details see UNCTAD. 4). TNCs can instigate closer integration not only through cross-border arm’s-length transactions (trade). NAFTA contains explicit FDI provisions on standards of treatment (national treatment and most-favoured-nation clauses). 132 . including FDI capital. leading to “deep integration” (UNCTAD. Ries and Swensson. But RIFs other than common markets and economic unions may also contain explicit FDI provisions for their members. import-substitution and domesticcontent requirements (Hufbauer and Schott. Terza and Arromdae. 1996).g. this observation also applies to other components of an enabling FDI framework. which had to wait for the 1992 Single Market Programme to come into effect. It must be recognized that.. Needless to say. among other things (UNCTAD. for example. Indeed. Most RIFs that do address FDI policy are common markets and economic unions that. where there are alternatives to them. can also take place in the absence of policy-led integration initiatives. and documentation of. 1996). where the asset sought is skilled labour. in the Republic of Korea). leading to “shallow integration”. 148). 1993a. procedures for the settlement of disputes. 1993. 1991) found higher wages to have a deterrent effect on location decisions. mainly at the sectoral level on the inward side. p. TNCs were attracted by markets that were protected by tariff barriers in the period preceding efficiency-seeking and competitiveness-enhancing FDI. such as regional growth triangles (Pomfret. and strategic asset-seeking FDI. the concept of complex integration strategies. the right of establishment et al. creating conditions conducive to the entry of FDI. allow the movement of capital. and it even applies to natural resources. Economic integration. there are virtually no restrictions on the outward side (Brewer and Young. in export processing zones. price elasticity of demand. But these were not enough to open various service industries to FDI. for example. in many instances. Regional integration frameworks -. their dynamic impact and role in the transfer of technology and in shaping local technological capacity were weaker than where these linkages were established (e. analyses of the location decisions of Japanese firms in the United States between 1950 and 1992 (Head. 1994) and of foreign investment entries into the United States between 1981 and 1983 (Coughlin. It would presumably reduce the need for resource-seeking FDI. as mentioned earlier.

3) estimated that roughly three-fifths of inward FDI in the core countries of the European Community prior to 1985 was within a 500-mile radius of Frankfurt. Despite the fact that investment issues are still often referred to as being among the “new” issues on the multilateral agenda. scheduled for publication during 1998-1999. the distribution of associated benefits and the need for regional policies. This raises the question of polarization vs.Chapter IV 34 35 36 37 38 39 40 41 For services. 1996a and 1997a. particularly in relation to rules and institutional mechanisms. language and responses to competitors’ strategies. particularly during major rounds of trade negotiations. Dunning (1997. What is new is that they are being considered more directly and more extensively. Many of the questions that are now being raised about a possible MFI were raised more than half a century ago at the time of the creation of the General Agreement on Tariffs and Trade (GATT). For a discussion of other issues. countries wanting to join the OECD or the European Union (through the association agreements) sometimes assume FDI liberalization obligations before they become full members. consumer protection and the like may also be required. Policy changes as regards deregulation. costs. spread effects. 133 . For example. For more detailed analyses of the issues involved in discussions of a possible MFI. 4) that TNCs may act as catalysts for these dynamic effects associated with RIFs. this can be observed even before countries become members of a RIF. the liberalization of FDI regimes alone is not enough to attract investment. Indeed. privatization. see UNCTAD 1996a and the series of UNCTAD issue papers in progress. p. see UNCTAD. Other important factors included skills. they are in fact not new. p. It has been suggested by Blomström and Kokko (1997. They have reappeared from time to time.

Tr World Investment Report 1998: Trends and Determinants 134 .

0065) 11.404) 1. Annex to chapter IV. Table IV. the measures of determinants. More than half of the variance in the investment levels is accounted for by these able IV. in the expected positive direction.0046) -5. which can be thought of as a predictor of future market size. then.950) 0.485) 0. in performing such an econometric analysis using the same list of determinants. translated into dollars by average annual exchange rates.137 (13. A second is the rate of growth of the host country.226 (0.187) 0.A. large markets and high-income markets attract more FDI.534 (25.previous five years Real GDP per capita R^2 Figures in parentheses are standard errors ** *** Significant at 5% level Significant at 1% level 135 . past gr o wth in real GDP.0549*** (0. which is related to their effective demand for the kinds of goods or services produced by foreign affiliates.682 1995 0.1.637** (0. the real GDP per capita. of the host country’s internal market. measured in current purchasing power parity (PPP) terms. Tab le IV. more precisely. However. The nominal GDP and. inward stock GDP. An econometric test of market related FDI variables There is a long history of econometric analyses of factors determining the amount of FDI a country receives.564*** (0.0025) 476 (1. based on these national market variables. One reason comparisons over time are difficult is that the measures of investment.579 Growth in real GDP .1 presents a version of an explanation of the inward FDI stock in each of 142 countries at intervals between 1980 and 1995. in three of the four years represented in the table.780 1990 0.Chapter IV IV. for the same set of countries over time. Regression of nominal inwar d FDI stock on nominal GDP.0414*** (0. measured in the same way.439*** (0.486) 0. One is the size of the host country or.A. the growth variable is growth in real GDP over the previous five years.A. A third is the average income of the residents of a country. There is some advantage.750) 0. The following analysis covers 142 countries over the period 1980-1995. gro GDP.0298*** (0.1. In other words. Several variables related to host country markets have appeared in some form in almost all of the past explanations of the extent of inward FDI.853) 1.591 1985 0. and real GDP per capita 1980 Nominal GDP 0. are statistically significant at the 1 per cent level.0524*** (0.0022) -377 (2. and the range of countries examined differ from study to study. The measure of market size is nominal GDP for each year.144) 0. it is hard to derive any conclusion from these studies as to whether the list of determinants has changed over time or whether some have gained or lost importance. and the average income variable is GDP per capita. but past growth rates are apparently not projected into the future by potential investors.

more generally. or by countries that have modified their policies to be more restrictive towards inward FDI. such as agglomeration economies. 1997a.2. and continued to produce higher than average levels of inward FDI. The coefficient for the growth of the host country market during the period increases in size over time and is statistically significant at the 5 per cent level for the final period. that attract FDI to an exceptional degree. red tape and corruption) and “political stability”.2. then the market variables and the change in real income for the current period can explain changes in investment over the ensuing five years. The coefficients of the residuals from the investment stock equations are strongly positive. outside of their domestic market characteristics. initial market size. society. In that case one would expect negative coefficients for the residuals. 1995). After considering a variety of measures for 66 countries that are potential additional explanatory variables (Mauro. Some recent literature on the determinants of inward FDI has focused on characteristics such as the extent of corruption (Wei. Host countries that have received more inward FDI than can be explained by their domestic market characteristics in a base year continue to receive more investment in subsequent years. Among the other variables in the equations of table IV. Positive coefficients might mean that the factors that produced high levels of inward investment relative to income and income growth were long-term in nature. if it has received more investment in the past than would be expected from its domestic market characteristics. Alternatively.Tr World Investment Report 1998: Trends and Determinants host-country market variables but the precision of the explanation reached a peak in 1985 and has been declining ever since. This result suggests that there may be permanent or at least long-term features of host countries. themselves created circumstances.A. Thus. Negative coefficients could represent a catching-up to more “normal” levels by potential host countries which had been previously neglected or which had in the meantime made their policies more welcoming towards inward FDI. If the residuals from these equations are taken as representing the effects of unspecified determinants of inward FDI levels. that attracted further investment. One possible interpretation of the residuals is that they represent transitory past events or policies that have caused some host countries to have larger investment stocks and other countries smaller investment stocks than would be the case if FDI were distributed host countries in a pattern optimal from the point of view of international investment allocation. two are used here for further examination: “bureaucratic efficiency” (which combines ratings for three categories: judiciary system. 1997b) and other aspects of the organization of the host government or. That decline points to the possibility that host country market variables have declined in importance relative to some other unspecified determinants of inward FDI. represented by nominal GDP. is the most consistent influence favouring further inflows of FDI. whatever their cause. the inward flow of FDI during a five-year period is higher if the recipient country has a larger market. An alternative interpretation of positive coefficients would be that high levels of inward investment. and if its domestic market has grown more rapidly than that of competing countries during the period. The results are shown in table IV. 136 . negative coefficients might indicate a relapse to more “normal” levels in those host countries that had been favoured as FDI locations in the past but had then lost their advantages.A.

532 Growth in real GDP .628** (0. the equations of table IV.104) 1985-1990 0.257 (4.3 for this smaller group.3.Chapter IV able IV.750) 0. Regression of nominal inward stoc k of FDI on nominal GDP.167) 0.A. able IV. inward flow GDP.662 1995 0.387*** (0.571 Figures in parentheses are standard errors * Significant at 10 % level ** Significant at 5% level *** Significant at 1% level 1985 0. The same is true if they are added to the inward flow equations (these equations are not shown here).172) 0. they do not add anything to the explanation.623* (0.0540*** (0.A.0504*** (0. Regression of nominal inwar d FDI flow on nominal GDP. inward stock GDP. If the government efficiency and political stability variables are added to the inward FDI stock equations of table IV. these additional variables do not.180*** (0. the story they tell is much the same: nominal GDP and per capita real GDP are both positive influences.0234*** (0. real GDP per capita.771 1. while past real GDP growth is not a significant factor.3.508 (1.2.2.676 (30.065) 0.105) 1.3.previous five years Real GDP per capita R^2 137 . no relationship is found.629* (0.current five years Real GDP per capita Residuals (from reg of stock on inv on no GDP.572) 1. from current gr o wth in real GDP.0033) -1. and real GDP per capita group f or a smaller gr oup of countries 1980 Nominal GDP 0.2 are shown in table IV. Tab le IV.123*** (0. Thus.0023) 8.A.834) 1.249) Growth in real GDP .849 (44.684 R^2 Figures in parentheses are standard errors ** *** Significant at 5% level Significant at 1% level Since the additional variables are available only for a much smaller group of countries.814** (0.051) 0.A. gro GDP. gro GDP.370) 0.482) 0.106) 0. If the residuals from this equation are calculated and related to the government efficiency and political stability variables.0086) -7. at least for a smaller sample of countries.359) 0.0026) 4.0400*** (0.0275*** (0.367 (6.0065) -1.0314*** (0.771 1990 0.A.A.0036) 609 (7. While the equations do not fit quite as well.228) 1990-1995 0.824) 0.A. account for the unspecified influences incorporated in the residuals.827 0. and residuals fr om inward stock inwar d FDI stoc k equations 1980-1985 Nominal GDP 0.103 (0.011 (0.0017) -896 (2.0473*** (0. its growth & real PC GDP) 0. past gr o wth in real GDP.221** (3.071) -0. Tab le IV.

4. the equations provide evidence that an institutional characteristic of a host country has a positive influence on inward FDI. is not generally statistically significant.259* (1133.1279*** (0.385) 0.A. inward stock GDP.317 1990 0.0209) 24. while a consistently positive influence.104 (3.0136) 11. Per capita income.378 (0. gr o wth in real GDP.815) 0. developing de veloping countries 1980 Nominal GDP 0.A.538 (526. the political stability variable is added and here.A.5. real GDP per capita.471 Figures in parentheses are standard errors * Significant at 10 % level ** Significant at 5% level *** Significant at 1% level 1985 0.419) 0. Tab le IV.594 (0. inward stock GDP.635) 0. Regression of nominal inward stoc k of FDI on nominal GDP.604 Growth in real GDP .491 1995 0.675 (3010.624) 3054.429) 1988.five years Real GDP per capita Political stability R^2 138 .719 (20. past gr o wth in real GDP.0200) -1.604 Growth in real GDP .Tr World Investment Report 1998: Trends and Determinants It has been argued that government-related and political variables would be more important in developing countries than in developed countries.472 Figures in parentheses are standard errors * *** Significant at 10 % level Significant at 1% level 1985 0.165 (0. Therefore the equations of table IV.718) 0.427) 0.0657*** (0.940) 0.367 (3.A.908** (953.A.4. In table IV.488) 0.737* (0.0638*** (0. gro GDP. for the first time.039) -0.560 (0.5.3 have been recalculated for developing countries alone.019 (0. They again confirm the predominant influence of host country market size.0510*** (0.382) 0. gro GDP. The results are shown in table IV.150 (7.4.0092) 3.5.311) 0.038) 0.0140) 11.0714*** (0.638) 0.312 (21.452 1995 0.254 1990 0.162) 511.0785*** (0.145) 0.307) 0.746) 0.1297*** (0. and real GDP per capita.0092) 2.A. able IV. and political stability developing de veloping countries 1980 Nominal GDP 0.239 (7. Regression of nominal inward stoc k of FDI on nominal GDP. and the explanatory power of the equations is considerably weaker for these countries.135 (0. where the range of the variables may be much smaller.0194) -2. Tab le IV.416) 2097. with larger coefficients than for the world as a whole.previous five years Real GDP per capita R^2 able IV.A.851 (3.049 (0.879 (2.0208) 16.0519*** (0.

4 are used. and residuals fr om inward stock developing inwar d FDI stoc k equations.598 Growth in real GDP .0216*** (0.776) 0.0151) 992 (6.180) 0. de veloping countries 1980-1985 Nominal GDP 0.A.579*** (0.0857*** (0.0404** (0.272 Figures in parentheses are standard errors ** *** Significant at 5% level Significant at 1% level 1985-1990 0. Regression of nominal inward stoc k of FDI on nominal GDP. Tab le IV.A. real GDP stability.current five years Real GDP per capita Residuals R^2 able IV. Tab le IV.393 (0. to explain the inflow of FDI to developing countries (table IV.6). real GDP per capita. Market size is again the main influence.6.179*** (2.0090) 6.A.003* (0.415* (0.0860*** (0.497 1990-1995 0.0148) 627 (4.585 Growth in real GDP . able IV.A. Regression of nominal inward flo w of FDI on nominal GDP.0184** (0.795*** (2.159) 0.940*** (0.0148) 1.284 1985-1990 0.281) 0.516 1990-1995 0. gro GDP. significant in only one period.A. It is followed by the residual significant in two periods.249 (0.254) 0. Political stability (table IV. inward stock GDP.078) 687 (447) 0. the growth in real GDP during the period.A. gro GDP.339 (0.current five years Real GDP per capita Residuals Political stability R^2 Figures in parentheses are standard errors * *** Significant at 10 % level Significant at 1% level 139 .567*** (0.262) 833 (665) 0.7.133) 0.417) 0.0431*** (0.0089) 7.249) 0.372) 1. from current gr o wth in real GDP.A.7. growth in real GDP.076) 0. and residuals fr om inward FDI stoc k equations and political stability.370) 0.179* (0.213*** (0. and real per capita GDP which is only marginally significant.6.997) 0.206) 0.0149) -670 (4.378 (5.Chapter IV The residuals from the equations of table IV. inward flow GDP.196) -285 (1.520) 0. current gro wth in real GDP.180) 0. and the initial per capita income.553*** (0. de veloping countries 1980-1985 Nominal GDP 0.7) does not contribute to the explanation of the inflow of FDI to developing countries in the equations. developing from inward stock per capita. together with initial nominal GDP.703) 0.225 (0.

All in all. for example the European Union or NAFTA. However. where it is positively related to a host country’s attractiveness as a location for FDI and in some periods adds to the explanation of the inward investment stock. explain less than half the variance among countries in inward FDI stock except in the last year examined. The coefficient of the residual variable calculated from the inward investment stock equation. while strongly significant. for the world as a whole. In developing countries. It does not. seems to be of some influence among developing countries. despite the fact that market variables explain a large part of the variance. A candidate for further explanation.Tr World Investment Report 1998: Trends and Determinants A conclusion to be drawn from the econometric analysis is that host country marketsize variables remain the dominant influence on inward FDI. representing favourable and unfavourable characteristics not identified here. not tested here. but the size and importance of the residuals and their predictive power is a challenge for further investigation. add to the explanation of inward FDI flows in these countries. however. political stability. would be existing membership in or recent adherence to a regional arrangement. Whatever factors in the past caused some countries to receive more FDI than might have been expected on the basis of their market characteristics remain influential. That contrasts with the situation for all countries. One institutional variable. becomes increasingly large over time for these developing countries. 1995. the domestic market variables. 140 . the institutional variables included in this exercise are not the explanation. although they explain less of the variation across countries in more recent years than in earlier periods. in which more than half the variation is explained in all years. national market variables do explain much of the variation in inward FDI attractiveness among countries. Source : UNCTAD.

take into account that. the European Union was considerably ahead of the United States. a part of outward FDI is undertaken by foreign affiliates. As always.2). outflows 53 per cent (figure V. but also divest (box V. They do not. Both outflows and inflows in 1997 were noticeably higher than in 1996. again far exceeding inflows and outflows of any other country. Their share of global outflows of FDI continued to exceed 80 per cent.1 and B. Flows into South Africa remained low until 1996 but doubled in 1997.4). especially in the case of developed countries. these figures are net figures. The European Union led the Triad in both FDI outflows and inflows. As a result. is indirect FDI (box V. In terms of FDI stock as well. A. Both amounts set new records (figures V. FDI as a percentage of gross fixed capital formation is considerably higher for outflows than inflows.2). the largest developed country recipients of FDI in 1997 were Australia and Canada (figure V. reflecting the fact that firms not only invest abroad. Outside the Triad.1) and the largest outward investors Canada and Switzerland (figure V. i.3). the share of the United States in worldwide FDI rose to 23 per cent for inflows and 27 per cent for outflows. the United States reported $91 billion in FDI inflows and $115 billion in outflows.2). Japan and the United States) accounted for 87 per cent of FDI flows into and 89 per cent of outflows from developed countries in 1997.2).1). however.Chapter V CHAPTER V DEVELOPED COUNTRIES Developed countries sent $359 billion abroad in foreign direct investment (FDI) in 1997 and received $233 billion in FDI in turn. the outflows substantially so (annex tables B.1 and B. The Triad (the European Union.e.1 and V. whereas their share of inflows was significantly lower at 58 per cent.1 For the developed countries as a whole. United States In 1997. followed by the United States and Japan (annex tables B. Inflows were 19 per cent higher than in 1996.2). In terms of the regional and sectoral 141 . with both of them very low for Japan (figure V. slightly less than the about 90 per cent for both in 1996.

see annex table A. 1996 and 1997 a (Billions of dollars) Developed outflows. that TNCs may withdraw even when foreign affiliates are successful. Reasons for divestment unrelated to corporate restructuring include decreased demand. Data for the two largest outward-investor countries -. Figure V. the following observations may be pertinent: /. V. divestment of foreign assets by firms engaged in FDI also takes place quite frequently. and changes in the regulatory environment. Ranked on the basis of magnitude of 1997 FDI outflows. a According to data for the countries that report statistics on divestment by foreign investors separately. Box V. the share of divestment in gross FDI outflows varies as well. based on a survey of Japanese firms. Divestment Although FDI represents investment made with a view towards a lasting interest in. De veloped countries: FDI inflo ws. Currently.. As the amount of divestment (like that of investment) fluctuates from year to year. overinvestment. Figure V. De veloped countries: FDI outflo ws. (For an illustrative list of reasons for divestment. enterprises located in countries other than the home countries of TNCs. 1996 and 1997 a (Billions of dollars) Source : UNCTAD. a Source : UNCTAD. restructuring and downsizing in order to increase the efficiency of their corporate systems as a whole. FDI/TNC database.1. mismanagement. divestments accounted for from 25 per cent of total Portuguese FDI to more than 70 per cent of Spanish gross investments in 1995 (box table 1). however. firms are generally moving towards consolidating their main activities around core competencies. and control of.1. broader corporate strategy of reorganization. including the divestment of assets located abroad.Tr World Investment Report 1998: Trends and Determinants Developed inflows.the United Kingdom and the United States -indicate that this share has fluctuated between 12 and 40 per cent for the former and between 14 and 66 per cent for the latter (box table 2).1.1) It is worth noting. FDI/TNC database. a Ranked on the basis of magnitude of 1997 FDI inflows. as part of a deliberate. 142 .. for example. splitting off non-core activities through divestments.V.2. While it is difficult to discern any trend.

A typical example concerns Japanese affiliates in the United States. The divestment ratio for FDI is thus unsurprisingly high in the United States -. 1998).. drive uncompetitive firms from markets. b /.3.. Large Japanese investments made there in the latter half of the 1980s were not always successful and were therefore liquidated.Chapter V Developed flows percenta centag gross fixed Figure V. The more competitive markets are. the greater the likely amount of divestment in absolute value. De veloped countries: FDI flo ws as a per centa g e of gr oss fix ed capital f ormation. (Box continued) (Box V. 1994-1996 Source : UNCTAD.1. the more likely it is that divestments will occur. • 143 . FDI/TNC database. A high level of competition can lead to low levels of profit and. more generally. In fact.a highly competitive market in many industries. contin ued) • The higher the FDI flows or the number of firms investing in a country. a Ranked on the basis of magnitude of 1997 FDI intflows as a percentage of gross fixed capital formation. the United States accounted for 30 per cent of the accumulated number of Japanese affiliates closed during the past 40 years (Toyo Keizai.

8 15. Republic of Korea. Gr oss FDI a and divestment in the United Kingdom and the United States. Brazil..9 4. . 1996 (Percentage) Home countr y Spain a United Kingdom 72.6 72.4 13. /.6 . based on FDI/TNC database.3 1. 16. Data are for 1995.2 d 24.9 26.3 . Data are for OECD countries.7 3. by host region.4 e 63.3 . China.9 21. 12. 17 Source : a b c d e f g h i j k UNCTAD. Data are for China.4 64. (Net) FDI flows plus divestment.7 45.3 56.0 21.1 13. and Thailand..5 25. by selected home countries.3 i .1 25.Tr World Investment Report 1998: Trends and Determinants (Box continued) (Box V.4 h 27.2 17. 144 . based on FDI/TNC database.3 3. Hong Kong. Includes also Central and Eastern Europe.8 28 48. Not including Japan and developed countries in the Pacific.5 0.8 30.6 20.5 38.3 28.3 12.0 44.9 b 80.8 20.7 48. 40.4 United States 25. East and South-East Asia West Asia Central and Eastern Europe World France 76.. Divestment as percentage of gross FDI abroad.2 73. Panama and Netherlands Antilles only.9 16. Data are for the European Union.6 c 12.1 20.6 22.1 5.3 21. Mexico.9 g 19.9 j 15 k 73 Por tugal a 28.2 0..1 76.3 72. contin ued) Box table 1.3 40.2 Host region/countr y Developed countries Europe North America United States Developing countries Africa Latin America and the Caribbean South. Box table Gross Box tab le 2.2 37.1 3.2 United States Gross FDI Divestment (Millions of dollars) 19 26 24 23 40 27 54 51 45 52 89 86 121 103 861 773 196 511 120 047 148 109 991 724 610 242 983 091 13 15 11 4 9 10 23 16 13 11 12 17 36 17 166 186 034 832 075 829 981 998 295 137 363 970 868 531 Divestment as percentage of gross FDI 66. Data cover only Saudi Arabia. Data are for Argentina.4 13.2 31.3 49.3 33. 1983-1996 (Millions of pounds and dollars and percentages) United Kingdom Year Gross FDI Divestment (Millions of pounds) 3 5 8 11 19 20 21 10 9 10 17 21 27 22 498 814 625 798 159 916 491 108 304 107 358 040 604 014 665 226 754 460 637 323 479 180 554 747 490 563 679 855 Divestment as percentage of gross FDI 19.. Data cover only Canada. 1... 76 116.1 ..5 76. Singapore.1.2 .2 17.6 40.9 19. Includes also Japan and developed countries in the Pacific. Data cover only the Russian Federation.0 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1 1 1 2 3 3 3 3 3 4 5 3 8 Source : a UNCTAD.4 f . 11..2 8..6 20.

such as the Netherlands Antilles. for example. which. does not indicate how much new investment is made and how much divestment takes place. an investment embargo by one country on another may induce TNCs to invest in the latter economy via a third economy that is not affected by the embargo. • Reported FDI. in Japan. Firms based in Taiwan Province of China.S. Bureau of Economic Analysis (www. b c d V. signifying that the resulting asset-stock is owned by the parent firm via the foreign affiliate. especially those owned by non-resident Indians..companies that own and operate affiliates abroad -. 1993. The profitability of foreign affiliates in the United States is relatively low: in 1995. Indirect FDI The sources of FDI are not only parent TNCs -. China. for example.4 per cent by way of profits (United States. a Whether indirect FDI occurs or not depends on factors related to home and host country policies as well as on factors related to firms’ strategies and behaviour.doc. can give a certain degree of autonomy to foreign affiliates vis-à-vis their parent firms. Department of Commerce.but their foreign affiliates as well. In the case of investments of a non-permanent nature. there are not many countries that report these elements of FDI separately. 1993) recommend that countries report gross investment. 365). b Similarly. divestment and net investment (gross investment less disinvestment) separately. being a net figure. the ratio of net income to sales was a meagre 1 per cent for foreign affiliates (United States.gov/bea/newsrel/trans198. Such divestment generally takes the form of withdrawals of intra-company loans. Regional headquarters. are typically a transient feature of a country’s outward FDI. Divestment by an individual company does not necessarily imply that the operations of the foreign affiliate are in an unhealthy state.Chapter V (Box concluded) (Box V. Department of Commerce.6 per cent in 1995 (Japan. Firm-related factors conducive to indirect FDI include the type of division of labour that exists within corporate networks. this attracted foreign firms. divestment was much higher than new investment. divestment can become large relative to gross outward FDI.htm). the Balance of Payments Manual of the IMF and the OECD’s benchmark definition of /. Box V. FDI by a foreign affiliate is indirect FDI. the IMF recommends not including such investment in FDI statistics (IMF.bea. Investments in financial intermediaries in tax havens. the parent company payables to the affiliates tend to expand with the growth of trade between them.1. In fact. therefore. Increases in parent company payables to foreign affiliates are also counted as divestment. 1996a). low ones may disguise divestment. In the ASEAN region. 1997a). Department of Commerce. for example. BEA New Release . as exemplified by United States FDI in these locations. See. 18 June 1998. may be able to make their own decisions as regards undertaking FDI. • Taxation and embargoes are among the country-specific factors that might induce indirect FDI. Mauritius had concluded a double-taxation treaty with India in 1982. 1996) and IMF (IMF. this ratio was 2. For example. however. If a foreign affiliate is established in order to supply the parent company with goods and services. whether inward or outward. However. United States affiliates abroad earned 5. OECD (OECD. Spain. Serving as a conduit for this indirect FDI. is supposed to include such investments by definition. from the Web site of United States. If countries have a large share of their outward FDI in tax havens. and that it represents. Although this is based on balance-of-payments accounting and is different from other reasons in nature. Mauritius has become one of the largest FDI sources for India. para. nearly half of the Japanese affiliates located in Singapore have affiliates in other countries in the region (UNCTAD.2. among other things. if only Spanish investment in tax havens is considered. Ministry of International Trade and Industry. conc luded) • FDI in tax havens or FDI made in response to incentives is particularly vulnerable to divestment. first quarter 1998". This is reflected in FDI statistics which normally report flows on a net basis. 1997b). large or sustained divestments can signal to host countries that they are no longer attractive locations for foreign firms. divested itself of more than 70 per cent of it in 1996 (box table 1). invest in China via their affiliates in Hong Kong. “U. it should be noted that this type of transaction is recorded as divestment as well. d High net figures may disguise reinvested earnings. an indirect flow of FDI from the parent firm’s home country (and a direct flow of FDI from the country in which the affiliate is located). to establish holding companies in Mauritius to invest in India. c _____________ a Reported FDI.. international transactions. In contrast. 1998b). which had more than a tenth of its gross FDI in tax havens.2. 145 .

. .. 3 . 4b 16 15 19 . OECD. .. 20 21 21 . .. .. According to United States data (the only data available on ultimate ownership). but $8 billion of this amount was held.. had one billion dollars’ worth of assets in the United States in 1995.. .2. China Switzerland 1996 United States 1992 Item Share of the number of parent firms accounted for by foreign affiliates Share of the number of foreign affiliates accounted for by foreign affiliates Share of outward FDI stock accounted for by foreign affiliates Share of outward FDI flows accounted for by foreign affiliates Share of foreign sales accounted for by foreign affiliates Share of foreign employment accounted for by foreign affiliates 1987 1993 Singapore 26 28 29 .3). d The inclusion of indirect FDI in the outward FDI of countries hosting foreign affiliates engaged in FDI obscures the actual volume of FDI made by nationally-owned firms of those countries.. 1996). . Tracing the ultimate beneficial owner. .. ultimately.the percentage of indirect FDI is relatively high. for example. for example. is difficult and possible only for selected countries (e. FDI by foreign affiliates located in the United States accounts for a small percentage of total United States outward FDI. assets in the United States owned.. 146 . the investment (an indirect investment by the affiliate’s parent firm) is recorded as outward FDI from that economy. . 1993. In contrast.. . Depar tment of Commerce. various years (Percentage) Canada 1990 Hong Kong.) Information distinguishing FDI made by nationally-owned firms from that made by foreign affiliates located in a given country is also limited. the importance of indirect FDI relative to total outward FDI varies among countries (box table 1). the same applies to strategic alliances many of which are made by affiliates and not recorded for the parent firm.. and hence the magnitude of the share of the ultimate home country as compared with the immediate home country from which the investment is made.V. . United States. .. (IMF. because the definition of FDI for balance-of-payments purposes is based on the location rather than on the ownership of the investing enterprise. 50 c .. see annex table A.V. . (Box V. . Indirect FDI from selected countries.2. .where affiliates play an important role -. reflecting the domestic orientation of the operations of foreign firms in the United States.. 1997d.. based on unpublished data provided by Statistics Canada. United States affiliates of firms based in Brazil.2). /. by firms based in the Netherlands Antilles were worth $11 billion in 1995. 17 a .Tr World Investment Report 1998: Trends and Determinants V. According to data for some countries.. the foreign assets of developing country TNCs can be underestimated. 30 c . FDI made by financial and holding companies in which the majority share is owned by foreign firms. (Interestingly. . On the other hand.. FDI originating in tax-haven economies is mostly undertaken by foreign affiliates. Share of foreign assets.. accounting for one-fifth to one-half of outward FDI. such an investment is typically not recorded in the statistics of the home country of the ultimate parent firm. However. . Estimates (not for a par ticular year).. 4 Source : a b c UNCTAD. by other countries (annex table A. .. For Canada and Switzerland e as well as Hong Kong (China) and Singapore -.. and UNCTAD.. but a reassessment of Brazilian foreign assets on the basis of data on inward FDI in the United States by Box table 1... continued) FDI include investment by foreign affiliates in the definition and advise governments to include it in their FDI data. ... c When it comes to a country that hosts a foreign affiliate engaged in FDI. Austria. ... .g.

Of course. subsidiaries .. as a matter of principle.. They are. Japan’s share also declined. (Box V. the biggest investors in the United States in 1997 were Germany ($10.2. It accounted for about one-fifth of total approved FDI inflows into India in 1997 (UNCTAD. TNCs that undertake FDI from one of their host countries may do so because they regard that country as a strategic location for their regional or global operations. A British firm.. is likely to invest in the United States directly. to $8. and branches .. after the United States.1). moreover. Still.V..7 billion) and the Netherlands ($10. Developing countries continued to attract about one-third of United States FDI outflows (table V. and their corporate networks become more and more complex. rivalling France ($8. 1993. 1996... FDI/TNC database). paragraph 362). paragraph 15).1): • For both inflows and outflows. the following developments stand out (table V.7 billion (annex table A. But FDI flows into the United States from Latin America and • V. the same FDI represents foreign-controlled FDI.2. since 1995. However. On the other hand.depending on their degree of specialization and competence within a TNC network -. while the IMF stipulates “Direct investment enterprises comprise .3). the second largest investor industry after insurance (Sfr 40 billion). the larger the share of indirect FDI by other countries’ TNCs in a country’s overall outward FDI. concluded) Brazilian affiliates in other countries shows that assets of United States affiliates ultimately owned by investors from Brazil amounted to $8. The policy implications of indirect FDI are complex. _______________ a b c d e As far as the host country is concerned. more than the level of FDI stock held by chemical and plastics firms (Sfr 30 billion). the greater the uncertainty of the national competitiveness of outward FDI. also emerging as a not unimportant source of United States FDI inflows (10 per cent).might also enrich the existing ownership advantages of their corporate systems by adding advantages that have been locally developed. In any event. investments by foreign affiliates will become more important.. That region’s share in United States FDI outflows amounted to one-fifth of the total. Thus. as TNCs operate more and more globally. making further FDI possible.7 billion) and the United Kingdom ($8. 147 . it may be important for them to monitor the volume and direction of indirect FDI because it may provide them with a better understanding of their own advantages for outward FDI: to the extent that outward FDI is determined by ownership advantages.Chapter V structure of United States FDI inflows and outflows. not through its affiliates elsewhere. At the end of 1996 foreign financial and holding companies in Switzerland held outward FDI stock worth Sfr 33 billion. As far as the host countries are concerned.. Latin America and the Caribbean were the dominant developing-region partner in 1997. say. Switzerland invested heavily in the United States in 1997: inflows from that country more than doubled. but this is a trend dating back to the beginning of the 1990s. either directly or indirectly owned by the direct investor” (IMF. In both inflows and outflows. associates . the European Union continued to be the most important investment partner of the United States. This is especially so in the case of internationally owned TNCs and firms with diversified shareholdings. the non-recognition of indirect FDI could lead to an overestimation of the competitiveness of a country’s firms in international markets and this may detract from the need to consider policy measures to enhance competitiveness.3 billion). Mauritius has been the second largest investor in India.. “Statistics . This pattern of investing in the United States through foreign affiliates in intermediate countries is not much followed by developed country firms.3 billion. the advantages underlying indirect FDI may be erroneously attributed to the immediate home country’s firms. should. the European Union’s share (and notably Germany’s share) in inflows declined markedly in 1997.6 billion). cover all enterprises in which the direct investor has directly or indirectly a direct investment interest” (OECD.. foreign affiliates -. However.

Switzerland and the United Kingdom in 1997. Germany. Ranked on the basis of magnitude of growth of FDI inflows and inward stock.1). 148 . 1996-1997 a (Percentage) Source : a UNCTAD. FDI/TNC database. However.2 • Investment inflows and outflows in manufacturing as a whole continued to decline significantly in relative importance. Finance and insurance Developed gro Figure V. De veloped countries: gr o wth of FDI. accounting for just over a quarter of overall FDI outflows and 40 per cent of FDI inflows in 1997 (table V. flows from offshore financial centres accounted for three-quarters of United States inflows originating from the Latin American region. Netherlands.Tr World Investment Report 1998: Trends and Determinants the Caribbean were not much larger than those from many developed countries such as France.4.

6 7.0 16.8 0.2 10.4 2.7 4.9 1995 92.6 1. For outflows.8 1.5 72. Includes the Pacific.9 0.7 -0.1 11.2 59. followed by chemicals and wholesale trade.6 48.7 1997 114.0 18. The composition of FDI by mode of financing reveals considerable volatility over time.4 55.7 21.7 4.. based on data obtained from the United States.9 13. Finance and insurance includes depositar y institutions.6 25.5 64.8 62.8 19.7 48. of which (percentage): Equity capital Reinvested earnings Intra-company loans 1995 58.6 3.2 13.9 4.4 25.5 0.5 -0.8 9.4 10.7 43.4 10.7 2.0 0.7 11.7 -0.4 34.2 13.8 33.1 10. and was strikingly different for inflows and outflows.1 16.6 32. in billions of dollars.3 17.0 9.Chapter V was the dominant industry in outflows (accounting for 42 per cent of the total).0 28.5 26. Equity capital continued to be the most important component of inflows to the United States in 1997.3 0. totals do not necessarily add up to 100 per cent due to investments in international affiliates that are not classified under specific countries.9 Item Total. There are two major able inward outward flows.9 49.7 10.2 3.0 .8 7.2 4.1 44.. Bureau of Economic Analysis webpage (www. .8 6...0 4. distributive trade includes only wholesale trade (excludes retail trade).3 2.1 17.7 51. East and South-East Asia f of which: China Central and Eastern Europe 92. 75.3 9.2 13.9 -0.2 6.9 1.3 2. For outflows.4 1. 149 .2 21.3 0.1 -0.0 2.0 3. For outflows.6 45.3 4.8 1.8 26.5 10. updated on 18 June and 19 June 1998) and information provided by this office. 1995-1997 Inflows 1996 76.8 0. Includes developing Europe.7 .6 By country/region (percentage): d Developed countries Canada European Union Other Western Europe e of which: Switzerland Other developed countries of which: Japan Developing countries Africa Latin America and the Caribbean West Asia South.3 6.9 8.3 4.0 9.4 3.5 39.8 10. Tab le V.8 7.0 51.gov. For inflows.0 6. United States: FDI inwar d and outward flo ws.5 1997 90.5 0.1 6.9 13.5 16.1 14.1 1.8 81.3 finance and insurance was also the dominant industry in inflows. 89.8 33..7 34.9 39.1.0 42.1 62. includes also Central and Eastern Europe.9 .5 9.8 9.4 13.8 10.3 53.4 2.1 14. .bea.4 46.3 By industry (percentage): Petroleum Manufacturing Distributive trade a Finance and insurance b c Other industries 6.3 1.3 Source : a b c d e f UNCTAD.2 16.6 4.1 4.2 0.9 24.3 1.0 65.doc. . Department of Commerce. finance and insurance includes real estate. 96..3 20.9 17.0 6.4 Outflows 1996 74..1 1.0 10.

150 . 1998). Real GDP growth of 3. equity capital inflows also reflected considerable funding provided by foreign companies to their existing United States affiliates to expand operations in the buoyant United States economy. intra-company debt played a marginal role in FDI outflows of the United States. One-half of FDI from the United States was accounted for by reinvested earnings in 1997.4 per cent versus 4. Low interest rates in European Union countries may have induced loan financing of FDI in the United States. Among industrial countries. the share of equity capital in total flows into the United States decreased from about three quarters in 1995-1996 to about a half in 1997. The United States also received a favourable ranking. down from two-thirds the year before. the share of intra-company debt nearly doubled. Persistent economic growth in the United States provided a strong stimulus to FDI inflows.8 per cent in 1997 exceeded growth in the preceding years. The World Economic Forum’s competitiveness index. which is based on various indicators and investors’ perceptions. the Netherlands and the United Kingdom than in the United States (IMF. The difference in lending rates was most pronounced between the United States and Switzerland (8. include the following (WEF. This exceptionally high share can be attributed to large loans by European financial institutions to their finance affiliates located in the United States (Bach. Prime lending rates in 1997 were about 2 percentage points lower in France. High corporate profitability in the United States in general went along with improved profitability of foreign affiliates located in the country. the United States received the highest index value in 1997.Tr World Investment Report 1998: Trends and Determinants reasons for this prominence. 1997): • Labour markets are much more flexible than in major European economies (except the United Kingdom) and Japan. to 27 per cent (table V. although lower than those of five developing economies (Hong Kong. The economy expanded for the sixth year in a row. only Germany reported slightly higher lending rates. United States companies acquired some large foreign businesses. Major competitive strengths of the United States. portrays the United States as one of the most attractive investment locations. However. Equity capital was the driving force of FDI outflows in 1997.5 per cent). However. only Singapore and Hong Kong.1). Correspondingly. overall M&A activity (some of which took the form of acquisition of equity of United States firms by foreign companies) was at record levels in 1997. various structural characteristics of the economy underlie its locational advantages. 1998a). Second. Consistent with this reasoning. many of which reinvested a higher share of their earnings in the United States. This may have contributed to the emergence of Switzerland as an important investor in the United States in 1997. Among major investors in the United States. significant transactions were concentrated in finance and in utilities (electric power and telecommunications) in response to new market opportunities provided by privatizations of state-owned firms in this field (Bach. 1998). China. providing a favourable environment for profitable operations. as identified by the World Economic Forum. the attractiveness of the United States as a location for FDI does not derive only from its large and growing market. China outperformed the United States. In addition. among the complete sample of 53 countries under consideration. First.

5 per cent of United States GDP in 1995.2 Source: a b United States.9 3.200). United States: R&D e xpenditure per affiliates of United States TNCs. Technological leadership is also reflected in the pattern of royalties and licence fees (Bach. Non-bank affiliates/non-bank parent companies. The 1995 R&D expenditure per employee was less than the corresponding figure for United States parent companies ($5. and Taiwan Province of China). • • All this implies that the United States is well prepared to benefit from inward FDI. Germany and Switzerland (WEF. the United States tops the list of all countries under consideration with regard to the quality of scientific research institutions and competitive advantages stemming from indigenous innovation. compared with an average of 66 per cent for all high-income economies (World Bank. appears to be most developed in the United States.5 3.01). 1997. compared with $2. 1997. the United States received $34 billion in royalties and licence fees. The same applies to marketing skills on which foreign investors may draw. 1993a.01). R&D employ foreign emplo y ee in f oreign affiliates and parent firms. Between 1990 and 1995. the sophistication of financial markets is considered more advanced in the United States than in any other country except the United Kingdom (WEF. In 1997. (Thousands of dollars) Department of Commerce. 1998.01) and overall infrastructure is assessed to be superior only in three countries: Singapore. table 4. Spending on R&D amounted to 2.Chapter V Indonesia.6 2. The service sector. with its share in GDP accounting for 72 per cent in 1995. More specifically.20). with one-third of outflows being directed towards developing Affiliates of foreign-based TNCs in the United States Foreign affiliates of United States TNCs b United States parent companies 2.1 per cent to 1. Depar tment of Commerce. with regard to productivity-adjusted wage costs (WEF. 1993b.08 per 1990 and 1995 a cent to 0. the Czech Republic and Luxembourg.2. 151 . The United States has benefited from globalization not only by way of FDI inflows but also by way of FDI outflows. 1997a and 1997b. table 3. but greater than the figure for their foreign affiliates ($2.600 in 1995. p. Singapore.07 per cent (United States. Majority-owned foreign affiliates only. 1997a). 1993b. table 7. • The United States is the frontrunner with respect to technological innovations. 1997.4 1. 1997. compared with payments of just $9 billion. For foreign able expenditure Tab le V. China. which contributed to the further transnationalization of United States companies in 1997.2 5.400 in 1990. This is exemplified by the extent to which the United States benefits from the transnationalization of R&D activities. R&D expenditure per employee in the United States affiliates of foreign-based TNCs amounted to $3.1 per cent.2). Moreover. Item 1990 1995 1997a and 1997b). 79). with just four countries showing an even higher ratio. table 6.200) (table V. 1993a. intensity decreased somewhat from 0. the R&D intensity (measured by the share of R&D expenditures in total sales) of United States affiliates of foreign-based TNCs increased from 0. The quality of management in the United States is superior to all other countries surveyed (WEF. which is attracting an increasing share of FDI worldwide.

compared to Source : UNCTAD.see section C) renders it rather unlikely for the United States to approximate the ratios for countries such as the Netherlands and the United Developed stock percenta centag GDP. Those ratios remain significantly higher for these two countries even if FDI stocks held in other European Union countries are netted out: in 1995. the outward FDI stock of the United States is considerably smaller as a percentage of United States GDP (some 10 per cent) than the ratio of outward FDI stock to GDP of most other industrial countries (figure V. 1998a).1). the adjusted outward FDI stock/GDP ratio is about twice as high as the ratio for the United States. the world as a whole. This “large-country” bias (shared also by Japan -. the share of developing countries in total German FDI outflows was just 11 per cent in 1997.5). This suggests that United States firms. Furthermore. The intensity with which United States companies are engaged in the international division of labour between developed and developing countries is in striking contrast to that of European companies. FDI outward stocks outside the European Union accounted for about 50 per cent and 64 per cent respectively of the total outward FDI stocks of the Netherlands and the United K i n g d o m ( E U R O S TAT. For example. as an economy. De veloped countries: FDI stoc k as a per centa g e of GDP. even after some increases. Yet. FDI/TNC database.5). the United States does not appear to be leading the way towards globalized production. a Ranked on the basis of magnitude of FDI inward stock as a percentage of GDP. this may be the case because large economies are typically less transnationalized than smaller ones. Consequently. Figure V. the same applies to FDI outflows as a percentage of gross fixed capital formation (figure V.5. which reveal particularly high ratios of outward FDI stock to GDP (figure V. To a large extent. have increasingly made use of the locational advantages of developing countries. Outward orientation by means of FDI has remained fairly limited so far: despite the large and growing outflows. 152 .3). 1996 a Kingdom. it is striking that the increase in the outward FDI stock/GDP ratio since 1980 has been relatively small for the United States. while still locating the largest share of their international production in developed countries.Tr World Investment Report 1998: Trends and Determinants countries (table V.

But when outflows are related to gross fixed capital formation.1 74. p. as data for other affiliates are largely missing. (See chapter II for further details). and majority-owned foreign affiliates for about onequarter. For example.Chapter V The notion that the United States is not as globalized in terms of international production as other countries with lower (and sometimes much lower) outward FDI stock is supported by the persistently strong concentration of TNC activities and resources in parent companies within the United States. contrary to what might be concluded from the sheer size of the country’s FDI abroad. 1997. 4 All this reflects that firms in the United States. 1997. both inflows and outflows were dominated by the European Union. 1985).1). which accounted for 94 per cent of the region’s inflows and 92 per cent of its outflows. Switzerland ranked fourth. are under less pressure to internationalize than firms in other developed countries. R&D expenditures were concentrated Item 1982 1995 even more strongly in parent companies. Totals refer to data for parent companies plus Commerce. Sweden and the United Kingdom (figure V. it was Sweden that attracted the highest FDI inflows within Western Europe as a whole during 1994-1996.8 76. p.6 which accounted for 88 per cent of Employment 78.7 Capital expenditures 80.2). Source: Mataloni. but also. 1997. employment expenditures gr oss product.3). the United Kingdom.4 worldwide R&D (93 per cent in 1982) by United States TNCs (Mataloni. A cross-country comparison of foreign assets. United States: share of parent companies in TNCs). however. It fits into this picture that the share of intra-firm trade in total United States exports and imports of goods has changed little over the past two decades (Zeile. followed by Belgium and 153 . in the region. This is because of the size and in particular the large internal market of the country. of gross product (value added).8 75. France and Belgium and Luxembourg were the most important recipients among European Union countries in 1997 (figure V. foreign sales and foreign employment indicates that the concentration of TNC activities at home was stronger for United States TNCs than for TNCs based in the European Union: the average transnationalization index of the top 100 TNCs for 1996 was 65 for the European Union (41 TNCs) and 43 for the United States (28 able Tab le V. p. Not surprisingly. 23). global sourcing majority-owned foreign affiliates. and United States. emplo yment and capital e xpenditures of However. In terms of absolute inflows. Department of a Non-bank TNCs. gross product. Western B. United States parent companies accounted for about three-quarters. was still limited in the mid-1990s: only 6 per cent of the value of United States parent companies' output was accounted for by inputs purchased from abroad. because of the integrated nature of its economy. the absence of barriers to competition and the maintenance of high levels of consumption. 46.3). capital expenditures and employment of United States TNCs (United States parent companies and their majority-owned foreign affiliates combined) in 1995 (table V. 45. and perhaps more importantly. Switzerland was the largest investor among the non-European Union countries of Western Europe. As a percentage of gross fixed capital formation. accounting for 6 per cent of Western Europe’s outflows in 1997 (figure V. Western Europe The countries of Western Europe received $115 billion in FDI in 1997 and sent $196 billion abroad. Gross product 78. a 1982 and 1995 companies in the United States to overall (Percentage) TNC activities has declined modestly since 1982.3. behind the Netherlands. the contribution of parent United States TNCs. Finally.

stability of the nominal exchange rate of a Intra-European Union investment was estimated by using the share of the ECU against the yen. followed by the Netherlands and Ireland (figure V. With dramatic increases in flows into the United States in recent Figure V. was highest in Belgium and Luxembourg in 1996. According to the World Economic Forum (1997). Eur opean Union. In sharp contrast. This again reflects the smaller size of these countries and the fact that the pressures to internationalize production.6). are greater for firms in those countries that do not have the same access to the large European markets for goods.1 billion) and Belgium and Luxembourg (by $ 1. the level was still lower than in 1995. the United States is catching up inflows. the inward FDI stock. and Ireland (figure V. relative to GDP. developments in Europe in 1997 were country-specific.6 billion). This is consistent with foreign investors’ approval of the country’s economic policies.4): • Inflows declined most notably in France (by $ 3. obtaining resources or enhancing efficiency. in the 1997 competitiveness index of the World Economic Forum (1997) and were placed in the bottom half of the group of 53 countries surveyed. including labour-market reforms. Especially in the cases of Belgium and Austria. Although the growth of flows into the European Union was substantial in 1997 after negative growth in 1996. this seems to be related to perceptions of foreign investors as regards these countries’ locational attractiveness: they were downgraded by 6 and 8 ranks. services and factors of production enjoyed by European Union member country firms. intra-European Union and European intra-European years.7 billion). if intraEuropean Union FDI is netted out.6. the United States emerges as the principal recipient of FDI during most of the years from 1980 to 1996 (figure V. respectively. Likewise.Tr World Investment Report 1998: Trends and Determinants Luxembourg. FDI/TNC database. United States FDI inflo ws. Austria (by $ 2. The 1997 performance of the European Union as a group in attracting FDI conceals strikingly different developments in individual countries (figure V. All of this the European Union in the total European Union investment provided in suggests that the major factors in FDI EUROSTAT. 1985-1997 with the European Union as the single (Billions of dollars) most important investment recipient (figure V. as might the 1997 appreciation of the dollar by about 10 per cent in nominal terms against the ECU (IMF.5). its share in overall European Union inflows rose from 28 per cent in 1996 to 34 per cent in 1997. whether for accessing markets. the United Kingdom received substantially increased FDI inflows. Exchangerate developments might have been expected to provide an incentive to FDI inflows into the European Union.6). 1997 and 1998b. The importance of FDI stock relative to GDP is higher in both inward and outward FDI stock for non-European-Union countries than for European Union members. the United Kingdom ranked at the top of all European • 154 . In addition.3). 1998a) and the Source : UNCTAD.

that intraregional FDI is again on the rise. underscore earlier findings according to which the effects of deepening integration on the intra-European Union distribution of FDI inflows are ambiguous. FDI outflows from the European Union to the rest of the world were about the same as those within the European Union (EUROSTAT. FDI flows into Ireland increased in line with an improving competitiveness record revealed in surveys and a high GDP growth of 8. Spain received less than half the FDI inflows it had received during the peak years of 1990-1992. • Developments were also diverse on the European Union’s periphery. 1997a).g.5 However. when Spain seemed to have benefited a great deal from corporate restructuring in anticipation of the single European market. Switzerland and Japan. followed by Germany. the first time since 1989 that this had occurred. In 1995. There are some signs. Much of inward FDI from outside the European Union comes from the United States.6 per cent. This could reflect the tapering off of the effects of economic integration.3 per cent in 1997 (three times higher than GDP growth for the European Union as a whole). In the service sector. The European Union as a whole also remained the most important outward investor in 1997. business services. Instead. Norway has become a large investor. this factor was 1. since 1993. But Japanese FDI has been declining since 1995. At the same time. 1998b).D. The United Kingdom maintained its position as the most important European Union investor abroad. and finance continue to be the dominant FDI recipients. depends critically on locational attractiveness of these countries (chapter IV. FDI flows among the member states of the European Union have lost some of their importance. high FDI inflows may also reflect competitive weaknesses of individual United Kingdom companies. exceeding United States FDI outflows by more than two-thirds (figure V. in the automobile industry. In 1985-1990. e. outflows from Germany and the United Kingdom increased in 1997.2). FDI inflows in manufacturing were almost on a par with those in services (EUROSTAT. the most recent year for which data are available. The diverging trends of FDI inflows. the 155 .Chapter V Union countries in this respect.7). The gap in outflows between the European Union and the United States has narrowed since the 1980s. 3. the United Kingdom’s growth rate (70 per cent) was particularly dramatic (figure V. The United States. Most notably. or instead (or also) improves the chances of peripheral countries to catch up with core countries. both in the core countries of the European Union and on its periphery. some other European Union countries reported steeply rising FDI outflows (particularly Spain and Italy). which rendered them vulnerable to takeovers and mergers.6. and the decision of the Government not to participate in the European Monetary Union.4).5 per cent versus 2. European Union outflows had exceeded United States outflows by a factor of 3. France and the Netherlands (figure V. In 1996. Moreover. real estate. 1998b).2). The United Kingdom also performed better than the European Union as a whole in GDP growth in 1997. in 1997.7 (UNCTAD. however. Among these major investors. Whether increased integration leads to a concentration of FDI in core countries. Switzerland and Norway together accounted for more than 90 per cent of inward FDI flows from outside the European Union in 1996. after the announcement of the European Monetary Union. These factors seem to have dominated two potentially depressing effects on inward FDI: the appreciation of the British pound vis-à-vis the ECU in 1997. At the same time.

Indications are that European Union TNCs are paying increasing attention to Asia. if intra-European Union investment flows are netted out (figure V. the European Union was the second most important source of FDI in Latin America (ECLAC. a Intra-European Union investment was estimated by using the share of the European Union in the total European Union investment provided in EUROSTAT. compared with 19 per cent each for Japanese and North American firms. notably from Germany and Austria. They can be expected to continue to catch up with other investors in Asia (UNCTAD-ICC. 1997 and 1998b. 1998).Tr World Investment Report 1998: Trends and Determinants outward orientation of European Union investors has not even rivalled that of United States investors. FDI/TNC database.7). • • Data on FDI outflows from selected European Union member states also suggest an increasing orientation towards developing countries: the share of developing countries in total FDI outflows increased from 10 per cent in 1991 to 14 per cent in 1993 and to 17 per cent in 1996. In 1995. 20). 1985-1997 (Billions of dollars) Source : UNCTAD. The presence of European investors increased. European Union firms have traditionally accorded less importance to developing countries as locations for their outward investment (European Commission and UNCTAD. This suggests that globalizing through outward FDI beyond the Union’s boundaries has taken second place to regional networking and strategic positioning within the Union. United States FDI outflo ws. p. overall German FDI increased by a factor of 1. however. Canada and Japan). Germany and the United Kingdom.7. 156 . Switzerland. especially from Spain. and considerably higher for outflows to a European intra-European Figure V. slightly higher for outflows to Latin America (which doubled). 7 The German case is noteworthy: the share of developing countries in German FDI outflows rose from 6 per cent to 12 per cent between 1991 and 1997.8 over the three-year period.6 The strong concentration in industrialized countries has. almost two-thirds of European Union outward FDI stock was held in just five industrial countries (in descending order: United States. provided the most important source of FDI inflows into Central and Eastern Europe. European Union. Australia. Major attractions were services and manufacturing in the MERCOSUR area. Comparing average German outflows in 1996-1997 with average outflows in 1993-1994. According to an UNCTAD-ICC survey (chapter VII). The regional distribution of European Union FDI outflows provides further evidence in this respect: in comparison with Japan and the United States. The share for 1997 is based on UNCTAD estimates. 34 per cent of the respondent firms from Europe said tha they would increase FDI in the short and medium term. 1996. Apart from the United States. intra-European Union and outflows.8 The increase was roughly of the same order for outflows to Central and Eastern Europe. 1998). declined somewhat: • FDI from European Union countries.

so far.5). In January 1998. Japanese outflows were much smaller than those of almost all other developed countries (figure V. the increase of FDI outflows continued in 1997 at a rate of 11 per cent (23 per cent in yen terms.2). Something similar is true of Japanese investment in Europe. Japan Japan ranked fourth (behind the United States. and exceeded the 1996 level in the case of China. the country is returning to its normal pattern. Japan’s share in worldwide outflows was almost cut in half to 10 per cent. in contrast.7. which is expected to decline in manufacturing by 6 per cent in 1998. C.10 In addition. The decline of Japan’s importance as an investor country is mainly due to the burst of the “bubble” economy in the early 1990s.11 Depressed demand conditions at home may have induced Japanese companies to invest abroad as foreign investment seemed more profitable than domestic investment. 1998). It should also be noted that the growth of FDI outflows in 1997 coincided with economic stagnation in Japan. as a result.3). the first time since 1974. the United Kingdom and Germany) in outward FDI stock in 1997. exchange-rate developments had an effect on Japanese FDI (UNCTAD.Chapter V group of developing economies in Asia. outflows in 1997 point to an ambiguous effect of the Asian financial crisis: German FDI outflows to ASEAN countries declined by 17 per cent in 1997 from 1996. The need to keep up 157 . With respect to outflows. When fears of a protectionist “fortress Europe” proved to be unfounded. though in 1997 they were comparable (annex table B. Japan’s relative importance has clearly declined. it seems that cyclical factors that should have had adverse effects on FDI outflows were overruled by longer-term strategic considerations. China dwindled in 1997 to one-fifth of the 1996 flows. FDI outflows have not been affected. Taiwan Province of China. Comparing the periods 1986-1990 and 1991-1997. declined modestly in the case of Taiwan Province of China. Japanese outflows declined from a yearly average of $32 billion to an average of $22 billion. but for no more than 6 per cent of Japan’s GDP (figure V. 1994a). therefore. they increased by 50 per cent to the Republic of Korea.9 In a sense. though. outflows recovered in 1993-1996 when the yen appreciated in real terms. Flows into ASEAN countries plus China.12 More importantly. Hong Kong. nearly returning it to the level of the early 1980s. Relative to gross fixed capital formation. Interestingly. The country’s outward stock of $285 billion accounted for 8 per cent of the world FDI stock. However. and Republic of Korea increased by a factor of 2. the incentive to undertake market-oriented investment projects in tradable goods in the European Union weakened. Several factors help to explain this development. This should have depressed FDI outflows as the international price competitiveness of producing in Japan and domestic liquidity was reduced but. Average outflows during 1996-1997 were similar to those of France but lower than those of Hong Kong. China. outflows to Hong Kong. although the yen had weakened considerably since 1996. With regard to FDI outflows to countries less affected by the financial crisis. For example. China. the real effective exchange rate was back to its low level of 1991 (IMF. the highest growth in the 1990s). during which FDI outflows were inflated by the seemingly abundant liquidity in an overheated economy. Outflows from the latter have exceeded those from Japan every year since 1993. possibly resulting in a decline of the economy in 1998.

even among the prospective European Union members. a trend that is likely to continue. respectively. for instance. In fact. V). however. • • All this suggests that Japanese investors still have some way to go to adjust to global competition. the transnationalization of Japanese TNCs has remained weak by the standards of other developed countries: • Japanese outward FDI stock in 1996 was low as a percentage of GDP. 1996. In 1985. Japanese FDI flows to this region increased considerably on a notification basis. lost slightly in importance 158 . not only compared with most other developed countries but also with the South. developing Asia hosted 19 per cent of total Japanese outward FDI stocks. In the past.Tr World Investment Report 1998: Trends and Determinants with global competition through establishing increasingly international production systems figures prominently among these. they have clearly been the frontrunners in drawing on the comparative advantages of neighbouring countries with lower per-capita income by investing in them. of the outward stocks of the United States and the European Union (European Commission and UNCTAD. The need to do so will become even more pressing if the current wave of mergers and acquisitions involving companies in Europe and the United States continues. The need to adjust to global competition may also affect the sectoral structure of Japan’s FDI. 1996a). 1995a. FDI outflows as a percentage of gross fixed capital formation were even lower in Japan than in countries such as Portugal and Spain (figure V. the very pattern of Japanese outward investment in Asia gave rise to the “flying geese” development paradigm (UNCTAD. As concerns the average transnationalization index of the Japanese firms in the top 100 TNCs. however. and outflows to Mexico tripled (table V. the United States and Western Europe have traditionally figured high in Japanese FDI.6).) By contrast. table I. The shares accounted for by Latin America and Africa declined until recently. In 1997. Japanese TNCs may then attempt to further strengthen their presence in Europe and the United States. although slight increases in FDI from Japan were recently observed (UNCTAD. Japanese companies can meet this need by building on existing foundations. with the economic recovery and improved macroeconomic fundamentals in Latin America. too. outflows to Brazil increased by a half. absorbing 43 per cent of FDI outflows on a notification basis in 1991-1997.4). Apart from developing Asia. which still absorbed one-quarter of Japanese FDI flows in 1997. while firms from elsewhere seek access to the Japanese market.3). In particular. Japanese FDI has remained marginal in Central and Eastern Europe. they ranked clearly below TNCs based in the European Union and in the United States (chapter II). (It accounts for roughly the same share of Japan’s outward FDI stock in 1997. compared with 6 per cent and 3 per cent. The manufacturing sector. In 1996. The United States clearly represents the most important host country. ch. For example. East and South-East Asian countries (figure V. investment in the primary sector had become less and less important. On the whole.5).

Includes developing Oceania. There is no breakdown available at all for industry.7 0.8 40.3 17.1 1. Finally. in particular the 1997 share of FDI stock in labour-intensive production in the textiles (including leather and clothing) and iron and steel industries was nearly half that in the mid-1980s.8 15.2 1.8 10.5 4.1 2.5 1.9 2.5 34.6 2.8 12.8 11.4 4.3 64.1 4.0 3.6 4.0 6.1 18. Japanese outwar d FDI on a notification basis.9 7.6 2.4 0.2 38.6 11.2 1.4 35.3 2.6 6.3 3. Includes South Africa.4 4.1 7.3 1.7 2.8 5.3 4.2 41. 1985-1997 b (Percentage) Region/industry 1993 1994 Flows 1995 Stock 1996 1997 1985 1997 By region Developed United States Europe d countries c d 69.1 10.9 52.8 0. Includes Central and Eastern Europe and developing Europe that together account for a negligible share.8 0.0 42.7 3.7 5.4 49.3 2. a major change had occurred already able outward Tab le V.5 20.5 51.5 36.0 2.0 0.0 8.0 30.0 30.5 63.9 45.1 3.8 0.8 1.5 4. a major shift towards the services sector occurred as well and real estate.5 1.0 4.3 0.5 29.1 6.9 62.2 0.3 4.4 0. whereas FDI in electric and electronic equipment gathered momentum and now accounts for the largest share in the manufacturing sector.5 9.0 18.6 6.4 5.2 24.1 3.7 0.8 14.7 12.0 13.4 4.0 3.5 23.2 0. As concerns services.9 22.7 0.7 3.3 35.8 16.2 3.2 13.8 2.6 65.5 3.5 15.7 67.7 5.0 9.1 33.2 49. FDI/TNC database.8 5.7 6.0 57.2 7.6 62.1 1.2 29.5 63.4 4.2 0.3 22.2 2.3 12.8 17. East and South-East Asia China West Asia By industry f Primary Manufacturing Food Textiles Chemicals Iron and steel General machinery Electric machinery Transpor t equipment Others Services Construction Real estate Finance and insurance Commerce Transport services Others All regions/industries (Billion dollars) 3.8 10.6 6.1 16.3 1.1 3. a by industry b y region and b y industr y.7 32.9 0.2 3.4 24.2 5.3 Developing countries Africa e Latin America and the Caribbean Brazil Mexico South.4 12.2 8.1 51.3 0.5 20.3 44.5 4.0 1.1 1.4).Chapter V in Japan’s FDI stocks.0 15.7 12.3 2.5 30. It is open to question whether the shift in Japan’s FDI from manufacturing to services will continue in the near term.9 36.8 13.6 2.1 54.7 15.5 3. 159 .3 7.7 2.9 40.7 18.1 4. The total for the three sectors does not necessarily add up to 100 per cent because FDI made for the pur pose of establishing and expanding branches is not allocated to any of these sectors.3 2.8 36. Fiscal year (April to March in the following year).3 18.6 8.8 7.4 4.3 5.4 1.2 0.9 9.7 10.5 1.6 3.6 0.2 1.4 4.6 22.6 10.5 4.4 2.9 50.9 42.7 8.8 Source: UNCTAD.2 15.5 0.4.1 0. therefore.8 1.8 0.6 23.6 5.9 16. finance and insurance figured most prominently (table V.5 13. a b c d e f Detailed geographical breakdown of FDI is not available on an actual or balance-of-payments basis.7 7.1 38.0 13.7 10.5 1.5 65.2 58.8 1.9 4.7 18.7 689.1 83.7 1.8 6.2 0. figures repor ted in this table are different from those reported elsewhere.2 10.7 0.0 3.6 3.9 12.

with Sanyo Securities and Yamaichi Securities. Yasuda Trust and Banking Co.. based on Nihon Keizai Shimbun . when flows in financial industries declined considerably. The preoccupation with financial restructuring within Japan may dampen the trend towards services in Japanese outward FDI. and various newspaper accounts. Number of f oreign branc hes of major Japanese banks. Japan’s FDI in manufacturing does not appear to be greatly affected by its current economic problems. since the operations of manufacturing affiliates abroad have traditionally been financed mostly from their own resources. able foreign branches Tab le V. Kansei) are planning investments in the United Kingdom in 1998. Toyota announced a large-scale FDI project ($590 million) in France in late 1997. and by borrowing from non-Japanese banks (Japan. the closing down of foreign affiliates and reduced new flows in these industries would have an impact on total Japanese FDI in the region.5. 1998a.5). some Japanese securities firms are also experiencing difficulties. This reflects the need for large-scale restructuring of Japan’s financial industries. including loans from parent firms. and Kankaku Securities. . As a consequence. By contrast. suppliers of parts and components for automobiles (e.g. As the importance of financial industries in Japanese FDI is most apparent in Europe. table 2-16-13).. Toyo Trust and Banking Co. going bankrupt in 1997. For example..13 Indeed. Likewise. which carry a large burden of non-performing debt and have to comply with stricter prudential standards. Source: a UNCTAD. MITI.14 The investment plans of these TNCs do not appear to be affected by lending constraints of debt-ridden Japanese banks. 90 per cent of Japanese TNCs are planning to maintain or even increase the current level of FDI in manufacturing.. Planned. according to a survey by the ExportImport Bank of Japan. one-fifth of all foreign branches of Japanese banks are expected to be closed down by the year 2000 (table V. the latter being one of the four largest securities firms in Japan. 18 March 1998. Bank of Yokohama Ashikaga Bank Hokuriku Bank Kiyo Bank Fukui Bank Number of foreign branches 1997 2000 a 22 13 25 23 25 50 12 25 40 36 4 7 6 4 Withdrew all Withdrew all Withdrew all Withdrew all 18 7 18 19 24 48 9 20 23 32 3 4 3 in in in in 1997 1997 1997 1997 Number of domestic branches 1997 2000 a 28 24 339 430 290 322 353 299 305 283 57 50 56 165 140 176 .Tr World Investment Report 1998: Trends and Determinants in 1997 and early 1998. 27 20 Less than 310 394 262 282 328 259 283 250 51 50 54 157 135 156 . 1997 and 2000 Bank Industrial Bank of Japan Long-Term Credit Bank of Japan Dai-Ichi Kangyo Bank Sakura Bank Fuji Bank Bank of Tokyo-Mitsubishi Asahi Bank Sanwa Bank Sumitomo Bank Tokai Bank Mitsui Trust and Banking Co. a medium-sized firm. . planning to close all foreign operations in 1998. 160 . even though the trend will probably continue on a worldwide scale. and various Japanese steel companies are interested in acquiring Korean steel producers.

On the other hand. On the one hand. 28 April 1998. in January 1998. it is also discussed in chapter VI dealing with Africa. Finland. Netherlands.europa. Including depositary institutions. For FDI outflows. 14 May 1998. http://www.int/en/comm/ eurostat. Data based on FDI outflows from Belgium and Luxembourg. see “definitions and sources” in annex B of this Report. Note that the 1997 data and the total FDI outflows in 1994 do not include reinvested earnings. though they increased again to 21 per cent in fiscal 1997 (table V. Germany. The United States Department of Commerce revised its FDI flow data recently to exclude investments in financial affiliates that are more akin to portfolio investments for 1994-1997.eu.4). Fiscal 1997 (April 1997 to March 1998) had a negative growth rate. Frankfurter Allgemeine Zeitung. With adjustment to European integration almost completed and protectionist fears receding. 1994a. The results are reported in its periodical. 18.int/ en/comm/eurostat. For other years in this Report.Chapter V Notes 1 2 3 4 5 6 7 8 9 10 11 12 13 14 The Republic of South Africa has been classified so far by UNCTAD under “developed countries”. FDI/TNC database). Journal of Research Institute for International Investment and Development (Kaigai Toshi Kenkyu-jo Ho). FDI/TNC database. Data from UNCTAD. Nevertheless.europa.eu. the United States FDI outflows are adjusted to exclude FDI flows to financial affiliates in the Netherlands Antilles only. http://www. Nihon Keizai Shimbun. Data from EUROSTAT. since it has many characteristics typical of developing countries. the share of intra-firm trade in total trade of United States parent companies has increased markedly since 1982. 161 . United States parent companies have accounted for a declining share in total United States trade in goods. Denmark. as well as other financial intermediaries. covering 445 manufacturing TNCs. For a detailed discussion. p. The most recent survey. For details. 1. France. “EU annual growth quickens to 2. The Export-Import Bank of Japan conducts a survey of the investment plans of Japanese TNCs every year. this may not be enough to restore growth. This is because of two countervailing developments. Sweden and the United Kingdom (UNCTAD. 24 February 1998.6%”. 1 April 1998. Japanese FDI outflows to Europe as a share of its total FDI outflows on notification basis fell from their peak of 25 per cent in fiscal 1990 to 15 per cent in fiscal 1996. Although Japan announced a comprehensive economic package of some $128 billion in April 1998 to stimulate the economy. intracompany debt transactions with finance affiliates in the Netherlands Antilles. p. was conducted in October 1997. “EU has 472 BN ECU in foreign direct investment”. Portugal. see UNCTAD. are reclassified from FDI to portfolio investments.

Tr World Investment Report 1998: Trends and Determinants 162 .

to those of a single Asian developing economy. Egypt.000 of GDP than many of the larger 163 . 1989-1997 1996 (figure VI.7 billion in 1997.comparable. the largest recipients in 1997 were Nigeria. hosted higher stocks per Source : UNCTAD. Tunisia and Angola (figure VI. Trends Flows of foreign direct investment (FDI) to Africa amounted to an estimated $4. a number of smaller African countries (e. Investment inflows as a percentage of gross fixed capital formation (GFCF) in 1994-1996 and FDI stock as a percentage of gross domestic product (GDP) in 1996 ranged widely among African countries.1).g.1. FDI/TNC database.2). As in the past several years. accounting together for two-thirds of FDI flows to Africa.3 and VI. flows into the region remain low.2). and the share of Africa in total FDI flows into developing countries remains a mere 3 per cent -. for example. Lesotho1 and Malawi). which received low inflows in absolute terms. with both large and small FDI recipients figuring among the highestranking countries in these respects (figures VI. With only a few exceptions. Morocco. FDI inflows to Africa. all of the 20 most important recipients of FDI experienced increased inflows in 1997 as compared to inflows Figure VI. Nevertheless. $1.but they have risen since the early 1990s. Moreover.Chapter VI CHAPTER VI AFRICA Trends A. the same level as in 1996 but over twice as high as at the beginning of the decade (figure VI. Malaysia -.4). and some countries are doing better than previously in terms of inward FDI.

South Africa. mainly in the petroleum industry played a significant role in this decrease. In yet other small economies.3 billion in 1996. Several factors contribute to these relatively high FDI inflows for the smaller economies in Africa.9 billion in 1997. a large number of sub-Saharan countries are still largely bypassed by foreign investors. under such conditions. Africa: FDI flo ws into the top 20 recipient Angola. accounting for slightly more than half of the flows in 1997. 164 . In countries. The noticeable increases in FDI inflows to flows Figure VI. there is no evidence of a systematic statistical bias in favour of small countries.4). However. firms might find FDI a more reliable mode to service the local market than trade. high FDI inflows per dollar of GDP might mean simply that GDP growth has been slow or negative over a number of years. over a period of time. According to the South African Reserve Bank. some countries (like Botswana) are relatively competitive investment locations for FDI undertaken to service the markets of larger neighbouring countries. since the majority of least developed countries (most of which are of small market size) have a low FDI-to-GDP ratio (table VI.3 However. raising its share in total FDI inflows to Africa from 29 per cent in 1996 to 39 per cent in 1997. although subSaharan Africa’s share in total investment flows to Africa declined by 10 per cent during 1997. higher than at the beginning of this decade.suggest that FDI flows within sub-Saharan Africa are less concentrated than before. FDI/TNC database. their inward FDI flows relative to their size have been comparable to or even higher than those of the larger economies (figure VI. the United Republic of flows countries in 1997 and flo ws to the same countries in 1996 a Tanzania and Uganda during 1994-1997 -. Apart from the sizeable reserves of natural resources that many of them possess.2.Tr World Investment Report 1998: Trends and Determinants recipients in 1996. Despite the declining flows to Equatorial Guinea and Nigeria. the decline of investment flows to Nigeria. investment inflows into South Africa (which is classified among “other developed countries” according to United Nations statistics and is not included in the ranking in the figures in this section) showed a significant Source : UNCTAD. a Ranked on the basis of the magnitude of FDI inflows in 1997. especially landlocked ones with poor transport infrastructure. even a relatively modest foreign investment would appear large relative to GDP. Flows into sub-Saharan Africa were an estimated $2.g.2 Among the subregions in the continent. However.1). North Africa continued to receive increased investment inflows. down from $3. it remained at 61 per cent in 1997. the share of oil-exporting countries in FDI flows into Africa remains significant.paralleled by the decrease in FDI inflows to Equatorial Guinea in 1997 and especially to Nigeria during 19951997 -. suggesting that. e.

France. France was. it revived with the sale of 30 per cent of Telkom to a consortium of a United States (SBC) and Malaysian investor (Telekom Malaysia). Inflows from the United Kingdom suffered a significant dip during 1987-1991. 16). In 1997. Germany. p. four-fifths of FDI came from just five countries: the United States. (Annual average) FDI flows continued to be driven mainly by privatization. The top target industries were telecommunication.5 South Africa may also be seeing the trailing off of an adjustment factor. 7 Most investment (60 per cent of total flows) was undertaken in the form of mergers and acquisitions (M&A). namely the return to South Africa of firms that had limited their presence or operated in neighbouring countries under the pre-1994 regime. overtaking the United Kingdom which had held this position during 1987-1991. The principal home countries of TNCs investing in Africa in the period 1982-1996 included the United Kingdom. Some foreign investment may also have been attracted by the restructuring and “unbundling” of large South African conglomerate companies.Chapter VI increase in 1997: from $760 million in 1996 to $1. FDI/TNC database. the United States.4 The increase in 1997 largely reflects inflows due to a limited number of privatization-related projects. there was a buy-back of 49 per cent of the shares of the vehicle-assembler Delta Motor by General Motors. however. 165 . flows percenta centag gross Figure VI. Germany and Japan. as well as sales of six radio stations. which had divested in 1989.7 billion in 1997 (South African Reserve Bank. Malaysia. fixed formation. 14). After an initial surge of privatizations in the late 1980s and early 1990s. A number of smaller European countries. such as the Netherlands and Switzerland. Africa: FDI flo ws as per centa g e of gr oss and food and beverages (Business Map. In 1997. moreover. the only major home country that continuously increased its investment flows to Africa during the years 1982-1986 and 1992-1996.2). the United Kingdom. Japan and the Netherlands (table VI. a Ranked on the basis of the magnitude of FDI inflows as a percentage of gross fixed capital formation in 1994-1996.3. energy and oil. During the first half of 1998. British and Malaysian companies in particular were the most dynamic investors. motor vehicles and components. at the end of 1997. unpublished data).6 Over the past four years. FDI unrelated to privatization seems to have decreased between 1996 and 1997. fix ed capital f ormation. including the purchase of a 20 per cent share in the Airport Authority by the Italian firm Aeroporti di Roma (ibid. as did those from the United States and Germany. the domestic airline Sun Air. Source : UNCTAD. p. France became the single most important investor in the region during 1992-1996. top 20 countries. Still. and a hotel and food group. privatization slowed in South Africa as the new government established new priorities and adopted new criteria for privatization. while FDI flows from Japan fell considerably during 1992-1996. a 1994-1996 1998.

United Kingdom’s FDI in Africa (after a Ranked on the basis of the magnitude of FDI inward stock as a percentage it peaked at 37 per cent of total British of gross domestic product in 1996. Seychelles. there are some striking changes in the sectoral composition of FDI in Africa from individual home countries and changes in it during 1989-1996. 1997a). these investments have been confined to limited numbers of countries in the region. followed by Taiwan Province of China and China. Guinea. On the other hand. investment from Germany and more recently the United States has been more dynamic in the secondary sector.9 To what extent Asian FDI in Africa . Zimbabwe8 and South Africa.). and other manufacturing have led to an upward trend in FDI in manufacturing and an increased share of the secondary sector in the total FDI stock. primary and fabricated metals. however. top 20 countries. FDI from developing Asia has increased in Africa in recent years (UNCTAD. The primary sector accounts for the largest share of FDI in Africa with around 40 per cent of total FDI stock stock percenta centag gross Figure VI. The 1998 survey by UNCTAD/ICC on the effects of the Asian crisis suggests that FDI flows to Africa from Asian countries other than the Republic of Korea might be sustained at a level similar to that in 1997 (see chapter VII).apart from the Malaysian FDI in South Africa that has already been mentioned -. such as Egypt. While French TNCs have tended to invest mainly in the primary sector during the past decade or so (together with increasing absolute volumes also in the other two sectors).1. with the former becoming the third most important source of FDI flows into Africa during 1992-1996. domestic pr oduct. while the product. the relative importance of the secondary sector has decreased for the Source : UNCTAD. 10 However. Africa: FDI stoc k as a per centa g e of gr oss in the period 1989 to 1996. Thus far. Uganda. FDI/TNC database.Tr World Investment Report 1998: Trends and Determinants showed substantial increases in their FDI flows into Africa. 166 . In the case of the United States. The principal Asian developing economies from which FDI flows originated have been the Republic of Korea and Malaysia.might suffer a decline on account of the Asian financial crisis that began in mid-l997 is difficult to predict. Mauritius (box VI.5). The sectoral distribution of FDI stock in Africa has remained stable between 1989 and 1996 (figure VI. the United Republic of Tanzania. investments in food and related products. Ghana.4. a 1996 importance of FDI in manufacturing has increased slightly in that period from 29 to 30 per cent and the share of FDI in services in total FDI dropped from 33 per cent in 1990 to just 27 per cent in 1996.

1: FDI flo ws into the least de veloped countries in Africa. selected indicator s. Germany and the United States. France. 11 1 5 20 1 13 244 11 19 1 3 9 16 13 16 -3 -3 11 -0 2 114 260 1 4 1 5 -2 15 1 3 110 3 9 9 1 17 14 12 10 11 8 33 4 2 -4 78 70 56 (Dollars) (Dollar s) 23 2 1 1 3 1 8 16 -2 . 83 19 7 5 25 204 4 12 1 3 7 7 6 20 -2 7 -0 0 34 53 2 1 16 -2 15 2 5 690 1 24 3 4 23 10 4 6 5 7 23 2 2 -4 16 14 17 (Per (Per cent) 26 1 1 1 1 8 7 -1 . 167 . For United States' FDI. 32 6 3 1 7 98 1 2 2 1 2 2 4 3 14 (Dollars) (Dollar s) 24 14 -1 2 1 4 282 8 1 1 9 5 1 1 1 3 2 -1 4 2 6 Memorandum: South Africa Average for developing countries a Average for Africa a -23 212 60 404 613 96 8 7 3 17 10 3 3 2 7 6 -1 8 5 10 20 7 Source : a b UNCTAD. 30 12 5 2 4 231 3 7 2 1 5 4 23 -1 4 35 76 1 1 6 -2 13 1 4 285 19 2 2 3 28 3 5 2 3 4 2 1 -7 10 6 16 17 1 2 2 7 . These include changes in the economic conditions determining inflows of FDI to African economies as well as changes in the policy able flows developed indicators.Chapter VI investment in 1994).. FDI/TNC database. even though it continues to account for a larger share of United Kingdom FDI stock in Africa than of the FDI stock of any of the other three principal home countries.e. 1987-1991 and 1992-1996 (Millions of dollars and percentage) inward flows FDI inwar d flo ws P er $ 1 000 GDP Ratio to GFCF b 1987-1991 1992-1996 1987-1991 1992-1996 verag Avera g e 1987-1991 1992-1996 Per capita 1987-1991 1992-1996 dollars) (Million dollar s) Angola Benin Burkina Faso Burundi Cape Verde Central African Republic Chad Comoros Congo. the tertiary sector gained in importance in both absolute and relative terms. Democratic Republic of Djibouti Equatorial Guinea Ethiopia Gambia. The Guinea Guinea-Bissau Lesotho Liberia Madagascar Malawi Mali Mauritania Mozambique Niger Rwanda Sierra Leone Somalia Sudan Togo Uganda United Republic of Tanzania Zambia 156 3 2 1 1 1 9 4 -13 . Several factors have contributed to sustaining and increasing FDI inflows into a number of African countries during the past few years. mainly through FDI in banking and insurance.. i.. Including South Africa. For FDI from Germany. this sector increased only marginally in importance.. Tab le VI. GFCF = gross fixed capital formation.

In the 30 years since independence. FDI inflo ws to Mauritius. The emergence of other viable low-cost host countries in Africa such as Kenya.9 Country/group Mauritius Memorandum: Developing countries 24 720.1.the same time that flows to the East Asian economies were growing rapidly. and the implementation of an export-oriented development strategy in the 1970s. compared to other African countries. respectively.5 1991-1997 Annual average Annual growth rate 23. FDI has played a pivotal role in the development of the country’s economy.6 Source: UNCTAD FDI/TNC database. especially in garments and textiles. which has led to a decline in the competitiveness of Mauritian exports. and clearly articulated policies favourable to FDI. but the country has also not yet been very successful in attracting FDI into new high-skill and technology-intensive industries. • 168 .have also decreased in the last few years. Manufacturing industries. preferential access to the European Union and United States markets. Investments in Mauritius from three out of the five major home countries of TNCs investing in the country -.0 92 181.Tr World Investment Report 1998: Trends and Determinants Box VI. Mauritius’ success in attracting FDI was largely due to its key comparative advantages: skilled.0 49.) There are a number of challenges Mauritius has to cope with in order to safeguard its earlier success in attracting FDI: • One challenge is posed by rising labour costs. /. indicates that there has been little progress in upgrading and diversification since 1985. as the Lomé Convention comes up for review. Investors in such other labour-intensive manufactures as leather. Box table le. flows to Mauritius slowed and even fell for a period. with investors moving to other lower-cost locations. FDI in Mauritius Mauritius is one of Africa’s most dynamic examples of economic growth. Mauritius already had a strong business environment with a vibrant entrepreneurial culture very early in its development process. especially the traditionally dominant textile and garment industries. The fact that low-skill activities continue to dominate FDI arrivals accounting for 98 per cent of FDI in both 1985-1989 and 1990-1997.0 13. have been the most affected. fancy goods and toys were also attracted. however. there has been not only a slowdown in attracting FDI into the traditional industries.380 in 1995) . a reasonably efficient physical infrastructure including cost-competitive export processing zones. the country has successfully restructured itself from a predominantly mono-crop (sugar) economy to an export-oriented manufacturing one and has now reached the status of a middleincome country with a per capita income that exceeds by far that of most other African countries ($3. China and the United Kingdom -. 1985-1997 (Millions of dollars and percentage) 1985-1990 Annual average Annual growth rate 22. Another challenge is the threat of elimination or reduction of preferential access to the European Union and United States markets. Madagascar and Zimbabwe has also increased competition for FDI in industries that have traditionally attracted it in Mauritius.0 23. inflows Box tab le . Also. FDI flows to Mauritius peaked in the early 1990s -. (The recent increase was mainly due to one relatively large textile project from India. The economic advantages of the country attracted investment in labour-intensive manufacturing industries. this at a time when flows into developing countries as a whole continued to increase... rubber.Germany. low-cost labour. an inevitable consequence of the rapid development process of recent years.0 22. In the early 1990s. Thus. a sound legal system for dispute settlement and yearly accounting practices. Following the establishment of an export processing zone.

Its potential as an offshore financial centre could be realized with a more active approach to tapping new offshore business. be compensated for by developing the country’s potential as a regional headquarters for TNCs. The loss of competitive advantage as a low-cost producer could. for example. especially privatization. 1) and several countries of the region achieved growth rates exceeding 5 per cent in 1997. and facilitating research and development. 169 . a reprioritizing of the education and skill-building policies. there is still need for further improvement of macroeconomic conditions. p. The latter include measures at the national level in host countries. the Government also supports the increasing outward investment by Mauritius-based companies in other African countries in order to strengthen the competitive edge of Mauritius-based industries.1. Finally. p. The Government of Mauritius has recognized the challenge and has started a number of initiatives to ensure competitiveness in the future. Mauritius needs to develop new comparative advantages in its established industries and competitive advantages in emerging industries. and other initiatives to support the technological upgrading of the domestic economy and to make Mauritius a more attractive place for FDI in higher-value-added activities. Source: UNCTAD. Thus. the average inflation rate for the continent increased from an already high 34 per cent in 1996 to 47 per cent in 1997 (United Nations. creating linkages with local industries. Overlaps in the activities of the different public institutions responsible for foreign investment approval and promotion could have resulted in bureaucratic and structural bottlenecks in the approval process. Perhaps the most important factor has been Africa’s macroeconomic performance which has improved significantly during the 1990s. including the issuance of multi-entry visas for foreign investors. the Government has taken steps to reduce delays in processing and approving investment projects through the establishment of a Board of Investment that -. along with the streamlining of investment promotion activities. in order to target the desired industries. based on Lall and Wignaraja (1998) and information obtained from national sources. a limited technological infrastructure and a low local demand for high technology products. such as a skills development programme. Investment in relevant education and skills-building could be accorded priority.11 However. Furthermore. Like comparable economies in South-East and East Asia. 1998a. 1998a.12 Sudan and (Box VI. and more open FDI and trade frameworks as well as business facilitation measures. concluded) • A third challenge is posed by the combination of a limited supply of industrial skills. A re-engineering of the existing incentive package may also be needed. Mauritius’ FDI policy regime and promotion strategy. Like the successful Asian economies. There have been delays in getting foreign investment approvals in Mauritius. 20). the establishment of a National Productivity and Competitiveness Council. increased liberalization of markets. a lack of local suppliers of inputs. the country’s investment promotion strategy might benefit from more focus on a reduced number of potential sectors and home countries for attracting FDI. Other factors are international initiatives and home country measures to encourage FDI in Africa. could be further improved. Moreover. The year 1997 was the fourth consecutive year of growth for Africa as a whole (United Nations. increasing local value added. Mauritius now faces the challenge of moving to a new phase in its economic development. and has introduced other measures to facilitate investment. fiscal incentives for foreign investment could be geared more towards promoting technological upgrading. which together have made it difficult for Mauritius to increase the spread and quality of its FDI.among other things -will implement a fast track approval procedure for investment projects. though largely favourable to attracting export-oriented FDI. despite continued efforts on the part of many African countries to pursue strict monetary and fiscal policies to ensure macroeconomic stability.Chapter VI environment influencing FDI in Africa. Also.

Ghana topped the list with $186 million. Privatization in Africa is becoming an increasingly important -. 1982-1996 4987 4742 3259 1401 1099 1072 912 656 318 256 226 203 107 97 57 48 8 -197 19251 Country United States France United Kingdom Germany Italy Sweden Norway Netherlands Austria Belgium Denmark Canada Switzerland Australia Japan Country United Kingdom France Japan United States Netherlands Switzerland Germany Italy Belgium Canada Finland Norway Austria Denmark Portugal Sweden Australia Country France United States United Kingdom Netherlands Germany Switzerland Italy Canada Norway Portugal Spain Japan Australia Denmark Sweden Finland Austria Belgium Country United Kingdom France United States Germany Japan Netherlands Italy Switzerland Norway Canada Sweden Portugal Spain Austria Denmark Finland Belgium Australia Total 4363 Source: a UNCTAD. Egypt. the sale of a 30 per cent stake in the Société Marocaine des Industries du Raffinage (SAMIR) to a Swedish investor contributed to the increase in privatization revenues. a 1982-1996 (Millions of dollars) Cumulative flows.Tr World Investment Report 1998: Trends and Determinants the Democratic Republic of the Congo being among the most seriously affected countries in recent years. The major home countries for FDI flo ws into Africa. based on OECD. supported by measures allowing foreign investors for the first time to purchase stakes of more than 50 per cent in public enterprises. Nonetheless. 1987-1991 2812 1300 1183 376 197 182 180 172 152 38 37 24 24 11 10 4 -199 6502 Cumulative flows.2 billion of the sales occurring in Egypt alone. able for flows Tab le VI. Kenya. $299 million of a total of $623 million in privatization sales in 1996 were raised through sales to foreign investors. In Morocco. p. and by the recent introduction of similar programmes in Botswana.5 billion in 1996.although far from fully explored -. In North Africa and the Middle East.avenue for foreign investment. 1982-1986 1200 1152 600 507 458 210 98 68 64 63 33 17 13 -15 -105 Cumulative flows. a 100 per cent increase as compared to 1995 (World Bank. Ghana. Tunisia. foreign exchange earnings from privatization in North Africa and the Middle East in 1996 were less than 10 per cent of the value of total sales. Senegal. Cape Verde. Eritrea. Mozambique. while a number of other developing regions such as Latin America and the Caribbean managed to reduce their inflation rates significantly. Table only includes the member countries of the OECD Development Assistance Committee (DAC). Opportunities for FDI have been created by steadily expanding privatization programmes in countries such as Angola. Cote d’Ivoire. total sales of stakes in companies to private investors amounted to $1. South Africa. with $1. Morocco. contributed to a remarkable increase in privatization sales in that country. Madagascar. Burkina Faso. 1998. FDI/TNC database. Nigeria.2. followed by Kenya with $137 million. Uganda and Zambia. 106). 170 .B). Namibia and Zimbabwe (see also section VI. 1992-1996 2290 1683 1575 807 714 461 282 201 196 194 107 21 17 13 12 10 10 -207 8387 Cumulative flows. selling a $112 million share in Ashanti Goldfields to foreign investors through an international placement of shares. The accelerated privatization efforts in Egypt in particular. suggesting that FDI through privatization was relatively low and that the domestic private sector was the main actor in the privatization process in many African countries. In sub-Saharan Africa.

b y sector.5. Germany Figure VI.Chapter VI stock from France. the United Kingdom and the United States in Africa. Germany. 1989-1996 (Millions of dollars) Source : UNCTAD. a b Includes South Africa. Figures for 1989 tertiary sector were not available. FDI stock fr om France . based on national sources. 171 . a sector.

1 4.0 75.0 .0 50. 3. pharmaceutical and bottling companies.0 90.0 . Panwell Group Tomos (Slovenia) KLM (Netherlands) SIPH (France) Lonrho Zambia CDC (United Kingdom) Total Outre Mer (France) CDC (United Kingdom) PSC Terna Shipyard Ltd. dating from 1987-1988.0 51. Ghana’s preferred pattern is to find a combination of foreign partners and local holders by offering minority stakes on the stock market. table T.3 3. African countries have also made efforts to improve their national policy frameworks for FDI.1 30. 1996 (Millions of dollars) Equity share acquired (Per Amount (P er cent) 5. a Name of company not disclosed. Avon Cycles Modern Trading Agencies Agip Petrol International (Italy) Foreign investor a Zambia Zambia Ghana Zambia Tanzania Tanzania Uganda Uganda Petroleum Manufacturing Automotive services Tourism Industry Industry Petroleum distribution Agribusiness 25. with privatization intended as the long-term outcome (SADC / Financial and Investment Sector Coordinating Unit (FISCU).A1 and T. including a cocoa buying company.0 70. Mozambique has one of the oldest programmes. only six of the 29 least developed countries in Africa for which data were available still had a restrictive regime for the repatriation of dividends and capital (UNCTAD. Joint venture Purc Pur c haser(s) Institutional investors GMG Investments PTE.3.3).. . Namibia’s strategy is first to “commercialize” state enterprises by.2 Company Compan y Ashanti Goldfields HEVECAM Tomos Ghana Ltd Kenya Airways Ghana Rubber Estate Ltd Northern Breweries (1995) Portland Cement Co.0 100. unpublished data.2 41. based on World Bank. 1998). Total (U) Ltd Domaine Heveicole de L’Etat Cavally Tema Shipyard & Drydock BP Zambia Ltd & Zamlube Refiners Ltd Metal Fabricators of Zambia Ghamot Motors Pamodzi Hotel National Bicycle Co. All other able Privatization inv foreign investor vestors Tab le VI. Ltd Agip (U) Ltd Kibimba Rice Co.1 2. Ltd Country Countr y Ghana Cameroon Ghana Kenya Ghana Zambia Malawi Uganda Cote d’Ivoire Ghana Industry Industr y Mining Agriculture Automotive services Airlines Industry Brewery Cement Petroleum Agriculture Transport Method of sale Sale of shares Tender Sale of shares Direct sale Joint venture Tender Direct sale Sale of shares . Madagascar formed a Ministry of privatization in 1997 and plans to include the national airline and oil company and telecommunications in its programme.0 50.0 23. 1997f.0 33. among other things..7 9. Ltd National Engineering Co.Tr World Investment Report 1998: Trends and Determinants which included a share of 26 per cent of Kenya Airways sold to KLM for $26 million (table VI.2 2.0 26. In 1998.0 60.5 Pre-emptive rights Pre-emptive rights Joint venture Tender Sale of shares Sale of shares Sale of shares Sale of shares Source: UNCTAD. and a palm oil plantation.0 75.2 26. Some 47 of the 53 African countries had adopted national laws governing FDI by 1997.6 5.13 Zambia is planning the privatization of mines and the national insurance corporation in 1998. exposing them to competition. Ghana intended to sell 20 state enterprises.. (Malysia) BP (United Kingdom) Foreign investors a Marubeni (Japan) Tata Zambia Ltd. Botswana issued its white paper on privatization in December 1997. Priv atization transactions involving foreign investor s in Africa. an oil refinery and an oil company.0 70.A2). 50.. These privatizations are generally based on long-term programmes and thus can be expected to continue to attract FDI.0 1. According to a recent survey of least developed countries.6 1. 172 .0 5.7 1.8 2.0 112.4 5. 28 of these legal instruments having been introduced or amended in the 1990s (chapter III).

59 5. and the availability and affordability of telecommunication infrastructure and computers were assessed by the companies to have been the areas with the greatest progress (WEF.13 6.1). Tunisia and Uganda (see section VI-B). Also.00 3. respondent companies considered that in a number of policy areas -including trade. for instance. according to se veral indicator s.00 5.89 4.67 4.13 5.22 5.16 5. In addition to the improvement of national policies related to FDI (see also section VI.68 5.4). almost all of the 23 African countries included in the survey received good evaluations of their dividendremittance and investment-protection policies (see also section VI.32 5.25 4. Mozambique.43 5.42 5.B.20 4.90 5. Dividend-remittance policies do not impede business development.35 5.20 4.50 Ranking of dividendremittance policies c 6.50 6.20 4. 1997 Ranking of xchang hange e xc hang e rate policy policy a 6. road infrastructure and telecommunications -.65 5.10 5.50 4.24 4. such as the TRIPS or TRIMS Agreements.94 4.69 5.B. Efforts on the part of many African countries to improve their FDI frameworks have reached such a level that “the perception that Africa is a risky place to invest is therefore correct only to the extent that in some African countries.90 Source: UNCTAD. 1998a).VI. p.58 6.96 4.82 6. access to finance.15 5. 40 African countries have adopted the Paris Convention for the Protection of Industrial Property and 41 African countries have signed one or more agreements in the WTO relating to FDI.88 4. 1997g). obsolete laws and excessive bureaucratic practices still exist and create an unfavourable investment able investor Tab le VI. as well as the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (42) (see also section VI. according to the results of a survey by the World Economic Forum.59 5. 1998a. a large number of African countries have signed bilateral investment treaties. Note: a b c d the investors in the par ticular countries were asked to give evaluations between 1 and 7 ( 1: strongly disagree and 7: strongly agree ) for the following statements: The exchange-rate policy is favourable to expor t expansion.significant improvements have taken place in Africa as a whole (WEF.09 5.92 5.33 6.59 5.4. Thus.75 5. improvement in institutions. The term FDI “front-runner country” refers to Botswana.05 5.70 Country Countr y Botswana Burkina Faso Cameroon Côte d’Ivoire Egypt Ethiopia Ghana Kenya Malawi Mauritius Morocco Mozambique Namibia Nigeria South Africa Tanzania Tunisia Uganda Zambia Zimbabwe Average.61 4.82 4. FDI frontrunner countries d Average.43 4.B. based on World Economic Forum.33 6.10 4.56 3.03 4. Most countries have also enlarged the number of industries open to foreign investment and many now produce lists of the few restricted industries rather than lists of the many open to investment.47 5. 173 . and table VI. Equatorial Guinea.09 4. the majority of African countries (41) had signed the Convention establishing the Multilateral Investment Guarantee Agency (MIGA). Namibia.79 4. 20).09 5.51 5. The investor friendliness of the FDI regulatory framew regulator y frame w ork in Africa: rankings according several indicators. although some countries are still in the process of revising domestic laws and notifying the WTO. which numbered 326 in 1997. Openness to trade.23 6. Investment-protection schemes are readily available for most foreign investors. 1998a.25 5.00 5.40 4. In addition. African efforts to reform FDI policy are increasingly acknowledged by both domestic and foreign investors.70 5.63 5. under the umbrella of the WTO Final Act of Marrakesh (UNCTAD.04 5. other Ranking of FDI protection pr otection b 4.46 4.95 5.72 3.Chapter VI countries had free or relatively free regimes that allowed the remittance of profits without major obstacles.22 6.06 4.84 4. Ghana. governance. and annex table A.). by 1998.

Democratic Republic of Cote d’Ivoire Egypt Ethiopia Gambia. Export and Tourism Promotion (PROMEX) Fonds de Promotion de l’Industrie (FPI) Centre de Promotion des Investissements en Cote d’Ivoire (CEPECI) General Authority for Investment (GAFI) Ethiopian Investment Authority (EIA) National Investment Promotion Authority (NIPA) Ghana Investment Promotion Centre (GIPC) Investment Promotion Centre (IPC) Lesotho Investment Promotion Centre (LIPC) Centre National de Promotion des Investissements (CNPI) Direction des Investissements Exterieurs. African member s of the World Association of Investment Pr omotion Ag encies (WAIPA). 1997 Country Algeria Angola Cameroon Cape Verde Congo. and provided long-term guarantees of their present access to the European Union under the Lomé Convention. Twenty-five African investment promotion agencies are currently members of the World Association of Investment Promotion Agencies (WAIPA) (table VI. The steps towards better access to foreign markets for least developed countries which were announced at a high-level meeting hosted by the WTO in October 1997 improved the access of the 33 least developed countries in Africa to the United States market subject to certain conditions. in June 1998 to discuss possible cooperation in joint marketing missions. 280). there are also signs of increased activity in joint investment promotion at the regional level. the investment promotion agencies of the member countries of the Southern African Development Community (SADC)14 held a joint meeting in Centurion.5. judging from companies’ assessments. the continent as a whole does not fare much worse than other developing regions (WEF. 1998a. While it is true that “red tape” is a problem in many African countries and corruption is still widespread -. as macroeconomic conditions improve and ). The efforts by African host countries to improve their investment climate are also increasingly complemented by interregional initiatives to promote investment and trade. and a joint staff-development programme. African countries have now established investment promotion agencies that focus on attracting foreign investors through a variety of measures. 28). They may also gain easier access to the markets of some of the able members Investment Promotion Agencies (WAIP AIPA). The Ghana Kenya Lesotho Mali Morocco Namibia Nigeria Senegal Seychelles Sierra Leone Sudan Tanzania Tunisia Uganda Zambia Zimbabwe Agency’s name Agence de Promotion de Soutien et de suivi des Investissements (APSI) Instituto do Investimento Estrangeiro (IIE) Investment Code Management Unit (ICMU) Center for Investment. 1997. Ministere des Finances et des Investissements Exterieurs Namibia Investment Centre Nigerian Investment Promotion Commission (NIPC) Guichet Unique Seychelles International Business Authority (SIBA) Department of Trade. For example. 1997h.5). measures to facilitate business. Indeed.Tr World Investment Report 1998: Trends and Determinants climate” (Mutharika. regulatory frameworks are becoming more liberal. exchange of experiences as to promotion practices and business intelligence. p. Tab le VI. 174 . Industry and State Entreprises General Administration for Investment Promotion Zanzibar Investment Promotion Agency Foreign Investment Promotion Agency (FIPA Tunisia) Uganda Investment Authority (UIA) Zambia Investment Centre Zimbabwe Investment Centre Source: based on UNCTAD. p. South Africa. Moreover.there are significant differences among African countries and. such as the reduction of bureaucracy and corruption as well as policies to promote FDI become more important.

The idea of giving FDI a more prominent role vis-à-vis official capital flows has also been discussed within the framework of the design of the forthcoming new Lomé Agreement. through providing assistance in finding appropriate partner companies or co-financing feasibility studies. Thus. the rate of return in Africa has averaged 29 per cent and since 1991 it has been higher than that in any other region. in particular. There are also important initiatives by home countries to encourage companies to invest in Africa. 175 . Since 1990. 1997. These include.as judged by the United States administration.Chapter VI more advanced developing countries. along with a number of other OECD countries. it is noteworthy that between 1980 and 1997 there was only one year (1986) in which the rate of return on investment was below 10 per cent. the European Union offers several schemes to support investment in the African.g. what is of particular interest to investors is the profitability of their investments in Africa. 1997). 1997.such as the association agreement between North African countries and the European Union that foresees the creation of a free-trade area between the European Union and Algeria. p. individual member states of the European Union. Some FDI in countries such as Morocco for example. and matchmaking programmes that bring domestic and foreign firms together. the measures under the Act are subject to conditions that countries must satisfy -. At the micro-level. Net income from British direct investment in Africa was reported to have increased by 60 per cent between 1989 and 1995 (Bennell. The Centre for the Development of Industry. In addition. OPIC had provided $775 million in political risk insurance and finance for investments in about 40 African countries (Mutharika. promotes technical or commercial partnerships between European firms and firms from African. is already attributed to the fact that it will be a part of the free-trade zone with the European Union in 2010. the support of feasibility studies. for example. Egypt.6). Within the framework of the current Lomé Convention. By 1997. Lang. with the expectation that the fund will induce private investors to participate (Mutharika. In the case of United States FDI (table VI. e. Japanese affiliates in Africa turned more profitable than in the early 1990s and have been even more profitable than those in any other region except for Latin America and the Caribbean and West Asia (figure VI. 1997a. 131) and. p. Caribbean and Pacific partner countries. in 1995. The initiative includes a proposal to remove all quotas and tariffs for apparel and textile imports from Africa. Other interregional agreements -. if the agreements are broad enough in their coverage. Morocco and Tunisia -can also significantly promote trade and investment flows. designed to promote private sector initiative in Africa in general and FDI in particular. especially export-oriented FDI. the United States House of Representatives approved in March 1998 the African Growth and Opportunity Act.6). p. 279. including developed countries as a group. in many years. 279). Improved access to developed country markets may increase the chances to attract efficiency-seeking FDI for those countries that already have the conditions for such investment in place (see section VI. Caribbean and Pacific countries. These include the provision of information. by a factor of two or more. have undertaken measures to promote investment in developing countries including some in Africa. that countries have established or are making continued progress towards establishing a market oriented economy and do not engage in gross violations of internationally recognized human rights. the Overseas Private Investment Corporation (OPIC) has been asked to play a lead role in the initiative by establishing a $150 million fund for equity investment in Africa and by setting up a $500 million private equity fund for investment in particular infrastructure projects.15 Apart from the activities of the European Union. However.B).

3 Source : UNCTAD.4 billions in 1996 to more than $200 million in 1997.8 3. 136).5 12. Investment outflows from developing Africa increased from $ 0.9 16.1 9. 1995 (Percentage) Source : UNCTAD.0 17.5 15. Other reasons for divestments by TNCs include problems in remitting profits as well as a deteriorating and difficult business environment that led to significant “hassle costs” for the private sector (ibid. various issues)16 -and that of the latter from 669 in 1984 to 573 in 1996 (Deutsche Bundesbank.9 12.3 .7 17.6 35. Japan and New Zealand.3 17.4 16.9 21.2 14.5 13. Profitability foreign by Figure VI.1 9.0 10..9 10.3 23. East and South-East Asia and the Pacific. b y selected host region.2 42.6 8. excluding Australia.6 14.2 1987 15. n.6 1986 5.1 15.5 13.9 11.5 25.4 16. The reduced number of affiliates has been attributed to divestment by some TNCs that had decided to re-focus their investment on core activities and core regions for their business and for which the reforms in Africa in the 1990s came too late to influence that decision (Bennell.5 23. 176 .9 30.0 1984 23.6 13.7 1995 35. p.9 17. South.5 13.8 21.1 18.6 35.4 23.0 27.4 n. Profitability of f oreign affiliates of Japanese TNCs.4 19.. Israel.6 4. 1997a..2 13.9 13.0 8.0 14.6.2 36.8 12. . a b c d e The rate of return is calculated as the net income of United States foreign affiliates in a given year divided by the average of beginning-of-year and endof-year FDI stock.6 7.3 9.4 29. a 1983-1997 (Percentage) 1996 1997 b 34. judging from the number of foreign affiliates of United States and German TNCs in the region.8 19.1 15.3 1985 17.9 18.2 13.7 14. 1998a. the number of TNCs that enjoy these profits appears to be declining.3 billion in 1996 to 1. various issues. However.3 13.7 19.5 1989 17.1 7.4 1993 25.0 21.6 1992 28.8 48.3 14.8 26.4 12.9 2.8 19.1 17. 16. Depar tment of Commerce.9 11.4 15.8 1990 24.1 30.2 12.3 34.8 14. Rates of return on United States FDI in Africa and selected regions.8 20.1 1994 24.3 10.4 13.0 27.7 44.a.4 14.9 11.7 41.2 22. 23.4 23.6 7. Ministry of International Trade and Industry.3 16.a.5 13.3 12. Including South Africa.0 12.2 16.9 13.a. Including West Asia.although in 1995 there was an increase in this figure to 516 (United States.0 15.5 14.6 20.135). which has dropped significantly between and the mid-1980s and mid-1990s.8 15. The increase was mainly due to the rise (from $500 million in 1996 to $800 in 1997) in outflows from Nigeria and an increase of outflows from Liberia from -0.1 billion in 1997 (figure VI.8 22. based on United States.3 1991 30. The number of the former declined from 596 in 1982 to 444 in 1994 -.5 20.2 24.0 20.8 13.3 19. 28.2 10. based on Japan.3 15. The stock data for 1997 used in the calculation are estimates by the United States Department of Commerce.1 13.2 40.5 21.6 36. These two countries accounted for over two-thirds of outward investment from Africa during 1994-1996.0 26.9 22.Tr World Investment Report 1998: Trends and Determinants able Tab le VI.5 11.6.7). p.7 27.7 22. Department of Commerce..1 18.0 20.3 Region Africa c Primary d Manufacturing d Tertiary d Other Asia e Latin America Developing countries All countries 1983 17.4 1988 13. Excluding South Africa.6 23. various years).0 n.3 12. . .

suggesting either that the improvements in economic prospects and the investment climate are not yet attractive enough or that they have not yet become widely apparent to potential investors. Africa: FDI flo ws fr om the top 17 outward investor flows from countries in 1997 and flo ws from the same countries in 1996 a There are encouraging signs that Africa may expect rising inflows of FDI in the future. could reduce the attractiveness of some of the countries that have been major recipients of FDI in the recent past. the simultaneous improvement in policy initiatives both externally (such as the least-developedcountry initiative by a number of international organizations and the Africa initiative of the United States) and internally augurs well for foreign investment in Africa notwithstanding the slight fall of FDI inflows into sub-Saharan Africa in 1997. the decline in commodity prices. Indeed. These "frontrunners" demonstrate that African countries can become attractive locations for foreign investors. In sub-Saharan Africa. It is also possible that in some countries the change of legislation has not yet been reflected in administrative practice. While some countries are benefiting from increasing FDI inflows. economic reform and improvements in the regulatory frameworks of many countries are increasingly recognized by both domestic and foreign investors. FDI/TNC database.7. frameworks for investment are a Ranked on the basis of the magnitude of FDI outflows in 1997. from $ 3. others are still waiting for inward investment to take off. including South Africa. Which countries are they? Africa as a whole trails other continents in attracting foreign investors. there are countries that stand out with an FDI-attracting performance in recent years that is not only better than the average for African developing countries but also above the average for all developing countries. even in a period when reports of political unrest and economic instability prevent many investors from exploring the opportunities 177 . Angola and Nigeria. B. total annual average inflows have also risen. Growth. On the other hand.2 billion in 1994-1996. This makes it important to explore what can be learned from the frontrunner countries in Africa about improving performance as well as image. being put in place in an increasing number of countries. however. However.Chapter VI *** flows from outward investor Figure VI.2 billion in 1991-1993 to $5. Recent country success stories 1. Inward FDI flows to North Africa have shown a robust positive trend in the 1990s. But economic fundamentals in the region are improving and enabling policy Source : UNCTAD. gold and diamonds. to attract greater investment. especially the prices of petroleum.

To capture the dynamics of performance. Tunisia. they accounted 178 . but because it is a period which has seen an economic recovery and a return to relative political stability in the continent and widespread policy change in the FDI area. Namibia. average ratio of FDI inflows to gross fixed capital formation. For the purpose of this analysis.Tr World Investment Report 1998: Trends and Determinants that the continent has to offer. The four indicators used capture only the level of FDI performance during a given period. Together. average FDI inflows per $1000 GDP. As the analysis does not focus on the impact of FDI. In other words. This filter yields the following seven countries (table VI. 1992-1996. subject to the condition that in the case of an indicator that related absolute FDI inflows to an economic variable. To qualify as a frontrunner. Uganda and Zambia. the Gambia. average FDI inflows per capita. Mozambique. first. Ghana. the latter (the denominator) did not decline. for a country to be counted as a frontrunner. flow indicators have been used. the increase in the value of at least one of the indicators from the period 1987-1991 to the period 1992-1996 for the country had to be higher than the increase in the same indicator for the average developing country. these 18 candidates had to pass through an additional filter. the following indicators have been used to measure performance with respect to inward FDI17: • • • • average annual absolute inflows of FDI. Chad. Botswana. Equatorial Guinea. 1992-1996. This section identifies a group of recent frontrunners and examines their characteristics and the factors underlying their success. namely an improvement in the performance on any of the four indicators which is above the level of improvement of developing countries as a group. Thus. the United Republic of Tanzania. Seychelles. Nigeria. Democratic Republic of Congo. as opposed to stock indicators. they are static forms of measurement. This filter yields the following 18 countries: Angola. Liberia. no indicators measuring the quality of the investment received have been used.7):18 • • • • • • • Botswana Equatorial Guinea Ghana Mozambique Namibia Tunisia Uganda The countries represent the most dynamic countries in Africa in terms of attracting FDI flows during 1992-1996 according to the selected methodology. 1992-1996. a country had. Because the analysis focuses on recent success stories. 1992-1996. The period 1992-1996 has been chosen not only to average out annual fluctuations. to receive FDI flows above the developing-country average as measured by at least one of these indicators. it needed to perform not only better than the average African country but also better than the average developing country. Lesotho. which tend to reflect FDI performance over a longer period. Egypt.

the frontrunner group excludes some African countries that were among the largest recipients of FDI flows during 1992-1996.19 The frontrunner group. with more diversified economies. This suggests that these two countries had only recently begun to attract FDI or resumed doing so after a break.5 6.4 3.6 16. Mauritius. Percentage change during the period 1987-1991 to 1992-1996.1 6. Equatorial Guinea is an oil-based economy and attracts FDI almost exclusively with its rich endowments of offshore oil reserves.8 . Tab le VI.6 143 888 920 263 267 348 19 796 18.1 96. more than offsetting the positive inflows of the other years in the period 1987-1991 and resulting in a negative sum for the FDI inflows of that period as a whole. GFCF = gross fixed capital formation. receive significant FDI in non-primary sectors.9 million.0.7 1.1 613. but also in their geographic location on the continent. Mozambique and Uganda are least developed countries (LDCs) while Botswana and Tunisia are middle-income countries). In the years 1989 and 1990.7 11.1 12. while other frontrunners such as Tunisia and Ghana.1 60 6.g.6 86. Conversely.3 7.0.2 17.7 10. Although some of them (e.4 387. 179 .1 33.4 137.4 -1.3 15. It should be noted that two of the frontrunners (Mozambique and Uganda) received below African.5 37.5 23. Including South Africa.0 189 8.3 100 845 754 201 99 158 15 175 46 32 1 1 23 11 0 95 282 7 2 72 44 4 108 778 778 228 221 306 16 672 60.2 29.9 78 732 869 247 163 197 18 816 6.9 285.1 11.9 77 5 7 39 212. Morocco and Nigeria that rank high among African countries on the basis of FDI stock indicators (annex table A. The group of the selected frontrunners is heterogeneous not only in their level of development (Equatorial Guinea. Uganda experienced negative FDI inflows of $1.2 1.3 77. provided the second criterion regarding an increase in one of the indicators was satisfied as well). Africa: Recent FDI frontrunner s by selected indicator s. Nigeria) received significant amounts of FDI flows during the period under consideration.1 689.8 9.6 82.VI.5 30.Chapter VI for more than 24 per cent of FDI flows into Africa in 1996 while representing only 9 per cent of Africa’s population and 8 per cent of the continent’s GDP.9 9.5 .7 121. all of these “historic” frontrunners lacked dynamism as defined by the second criterion mentioned above and are therefore not in the centre of this analysis.9 109.8 14. able frontrunner by ontrunners indicators.3 111 3.3 108.average FDI flows during 1992-1996 (since either absolute or relative FDI performance above the developing country average allowed a country to enter the ranks of the frontrunners.4 33.0 10.8 20. As regards economic structure.4 54 3.5 23.2 8. 1987-1991 and 1992-1996 (Millions of dollars and percentage) Avera verag inflows year Avera g e FDI inflows per year 1987-1991 1992-1996 dollars) (Million dollars) Change Chang eb (Per (Per cent) inflows FDI inflows per $1000 GDP 1987-1991 1992-1996 dollars) (Million dollars) Change Chang eb (Per (Per cent) inflows Ratio of FDI inflows to GFCF a dollars) (Million dollars) (Per (Per cent) inflows FDI inflo ws per capita dollars) (Million dollars) (Per (Per cent) Change Change 1987-1991 1992-1996 Chang eb 1987-1991 1992-1996 Chang eb Botswana Equatorial Guinea Ghana Mozambique Namibia Tunisia Uganda c Average for Africa d Average for all developing countries d 56.8 98 8 20 164 Source : a b c d UNCTAD FDI/TNC database. moreover.1).7.9 3. does not include a number of countries such as Egypt.9 2. This heterogeneity underlines the need for a broad-based analysis of the determinants contributing to the relative success of the frontrunners in attracting FDI.8 and $5.2 14.3 5.

has like some other (non-frontrunner) 180 . only for a few of the frontrunners could the level of macroeconomic stability have played an important role in attracting above-average FDI. For example. 39). in Mozambique which has seen the ending of a long-standing civil war. Thus. With the exception of Namibia. the degree of stability varies significantly and not all members of the group have performed better than the rest of Africa.was that it was seen as a stable country with a strong economy and fewer uncertainties than other potential locations (Corporate Location. Tunisia. it might well be a key factor explaining the recent performance of the frontrunners. being influenced by the political situation of a country.2 per cent for the 1990s. However. there is a general trend towards more open trade regimes in Africa. apparently. but there is no evidence that the trade regimes of the frontrunners have differed significantly from those of other African countries in the 1990s. for example. 1998. the frontrunner group has also made progress. six of the seven frontrunners managed to reduce their average annual inflation rate in the 1990s. Although the threat of unrest and armed conflict has not disappeared. Thus. although their deficit levels in the 1990s are still higher than the African average.has been found to be the most basic factor for companies considering investment in Africa (Sachs and Sievers.8). there appears to be no systematic difference between the front-runner group and other African countries. 1994. one of the frontrunners.as.including the predictability and reliability of the regulatory framework affecting business.Tr World Investment Report 1998: Trends and Determinants 2.9). the situation is mixed. one of the reasons why Hyundai decided in 1993 to establish its car assembly plant in Botswana -. As for the government deficit as a percentage of GDP. There are several examples of TNC decisions.intended mainly to service the South African market -. another important factor influencing FDI flows to a country. some of them exceeding an average of 20 per cent for 1990-1996. such as the tax system -. in particular outside the primary sector. 9). nor were the frontrunners necessarily more integrated into the world economy as measured by the ratio of the sum of exports and imports to GDP20 (table VI. Why do they perform well? The heterogeneity of the frontrunner group of African countries identified above suggests that a variety of determinants has to be looked at in a search for the underlying reasons for their superior performance as regards inward FDI in recent years (chapter IV). With respect to economic stability. While almost all frontrunner countries show a trend towards increased macroeconomic stability. all the frontrunner countries for which data were available have reduced their budget deficits gradually since the beginning of the 1990s (table VI. Tunisia is the only country in the group with a relatively low rate of inflation of 5. (a) The policy framework Almost all of the countries that have been identified as frontrunners have made considerable progress in acquiring or regaining political stability in recent years. Since political stability -. p. another indicator of macroeconomic policy. As judged from several admittedly rough indicators such as the mean tariff level applied in 1990-1993 or the proportion of all goods covered by nontariff barriers.21 However. As regards trade policies. All other FDI frontrunners had significantly higher rates. although the frontrunners’ ongoing efforts to improve the macroeconomic picture could have been perceived by foreign investors as evidence of the long-term commitment of their governments to create a more stable and business-friendly environment. conditions have improved . p.

1 .most recent year (II) a b 11. managed to attract efficiency-seeking FDI in such industries as textiles and apparel. 1998. This has involved. Botswana. have signed the convention establishing MIGA. export-oriented industries is only just beginning.Chapter VI countries including Egypt. and. the regulation governing the Industrial Free Zones designed for investors with a minimum investment of $5 million and a required minimum export content of 85 per cent of production came into effect only in January 1998 (SADC/FISCU. all Africa c Rate of inflation 1980-1990 (I) a 10.4.4 0.3.3.7 30.6 -16. while in the rest of Africa only 34 of 46 countries have able indicators macroeconomic for frontrunner Tab le VI. The other countries in the group have signed only some of the existing conventions (annex table A.VI.0 .22 These countries have signed all principal international conventions related to FDI and are members of all relevant international institutions that deal with issues related to FDI.5 2.0 Country Botswana Equatorial Guinea Ghana Mozambique Namibia Tunisia Uganda Average.(I) + 0.3 103. In terms of signing international agreements governing investment protection (annex table A.7 Overall government deficit(-) or surplus (+) as a percentage of GDP (current prices) 1990-most recent year b (IV) 5. 1998.18.86.6 . Including South Africa.4 52. even these countries.2).1 . the setting up of EPZs or other schemes particularly targeted at investors in efficiency-seeking.14.1. although with significant differences. In Mozambique.8 -3. Tunisia and Uganda.4 2.6 Difference (IV) .0 . 181 . the most active countries in the group are Ghana. for instance. Mauritius and Morocco.2).8.3 47.2 12. The latter is particularly true for Equatorial Guinea and Namibia. such as exemption from import duties for inputs into export goods manufactured in the country or other trade privileges for companies operating in export processing zones (EPZs). among other things with the help of appropriate trade policies.5 4.12. a b c Refers to consumer price indices (general). (1980 = 100). including MIGA.4 .1 Rate of inflation 1990.7.(III) -3. in most cases.8 5. As for the policy framework for FDI per se.5 .VI. 59). to 1996.3 17.5 5.2 .8 4. offering special incentives. among other measures. all of the frontrunner countries appear to have made special efforts to improve regulations and measures concerning FDI. p.6 + 14.9 .5 16. However. like other frontrunner countries.6.8 43.9 30.5. to a lesser extent.2 10.9.1 5.8 11.9.5 8.7 . and there are shortcomings in areas important for the successful attraction of such investment (see subsection (c) iii below).0 .7 Difference (II). the International Convention for the Settlement of Investment Disputes between States and Nationals of other States (ICSID) and the Convention on the Recognition and Enforcement of Foreign Arbitral Awards.9 6.9 - . Africa: selected indicator s of macr oeconomic stability f or recent FDI fr ontrunner avera verag for countries and a vera g es f or all Africa (Percentage) Overall government deficit(-) or surplus (+) as a percentage of GDP (current prices) 1980-1990 (III) 9.6 . In most of the other frontrunner countries.9 17.9 9. based on African Development Bank.9 6.2 16.8 Source : UNCTAD.0 3. “Most recent” refers.

6 83.82 0. based on World Bank. the national investment codes of most of the FDI frontrunner countries had been revised by the mid-1990s with the general aim of encouraging investment. 33. . 15.3 28. .5. 1997c.2...3 0. by and large.24 While there is no comprehensive comparison of investment codes of African countries based on objective criteria.8 Source: UNCTAD... 21.3 . 11. averaged over ten years.. . In the conclusion of double taxation treaties (DTTs) the picture is also mixed among the frontrunners.8 55.. the frontrunner group appears to have been more active than other African countries.7 9...9 . 182 . . While the frontrunners signed.3 3.6 28.0 5.3 9.Tr World Investment Report 1998: Trends and Determinants done so.2 .. In bilateral investment agreements (BITs) also. c 1990-1993 Standard deviation of tariff rates.9. as with international conventions.1.. Computed as the difference between the end points of the period shown. 8. By 1 January 1998. . the 41 non-frontrunners for which information was available averaged only five BITs per country.more than half of the 41 treaties concluded by the whole frontrunner group and more than any other African country. 4. -0.2 . ..2 25.. conducted by the World Economic Forum (WEF.. there are differences within the group: i. .5 -1. 32. 81... on average. while Tunisia signed 41 BITs (exceeded only by the 43 signed by Egypt) and Ghana nine.. Africa: total real trade a as a share of GDP and indicator s of trade barrier s frontrunner in recent FDI fr ontrunner countries and other African countries (Percentage) Real trade as share of GDP Average annual difference Share 1980-1983 to 1981-1993 1990-1993 b Proportion covered by non-tariff barriers. the subjective perceptions of investment regulations by foreign investors provide some evidence that the frontrunner countries.0 .25 the group’s investmentprotection schemes for foreign investors received higher average marks from respondents than the other countries included in the survey. Again.. . .1 24.23 With respect to national policy frameworks for FDI.. 1998a). The average for the 45 African non-frontrunner countries was more than seven DTTs each -.0 . with Namibia and Tunisia receiving the able indicators barriers Tab le VI. c 1990-1993 106.1 . All other frontrunner countries for which data are available had signed five (Namibia) or fewer such treaties.5 .higher than the frontrunner average of five.4 .9 -3..7 .9 . 42.0 45.3 50.. ..5 34. 13.6 and 6.3 .e.7 . tables 5.1 . For all goods. in a survey of investors in 23 African countries.4) Thus. a b c Real trade is the sum of exports and imports of goods and ser vices measured in constant prices.0 17... Tunisia had signed 23 such treaties -. c 1990-1993 Country FDI frontrunners Botswana Equatorial Guinea Ghana Mozambique Namibia Tunisia Uganda Other African countries Egypt Lesotho Mauritius Morocco Nigeria Mean tariff rate.. had made more progress in creating a regulatory environment conducive to FDI than most other African countries (see table VI. which was below the average for the non-frontrunners. 30. .. 24. 35.. the other frontrunners had all concluded less than five BITs each by the end of 1998.39 . almost eight such treaties per country.2 .

the FDI frontrunners appear to have made the most progress in this respect. 187. The countries surveyed in the Africa Competitiveness Report performed worse in terms of the effectiveness of antitrust policy -. in particular from Portugal.as compared to other FDI-related policies. 1997a) -. 1997b. Still. some of the FDI frontrunners are doing much better. p. 1996). another major component of an FDI framework. One consequence of the complexity and nontransparency of regulatory frameworks is that foreign companies have to hire experts (typically ex-functionaries) to deal with the regulatory processes.Chapter VI most positive evaluations (table VI. In this case.22). businesses appeared by and large to have found the competition or anti-trust policy frameworks in FDI frontrunner countries acceptable.28 In the case of Mozambique. that received a rather low assessment in both respects.3).27 While privatization does not necessarily imply that foreigners are allowed to purchase stakes in the privatized enterprises. Mozambique and Namibia (WEF.040 privatization transactions undertaken in sub-Saharan Africa before 1997 are accounted for by the six subSaharan frontrunner countries (World Bank. 1998a. annex table A. 278). FDI flows were also significantly associated with the privatization programme (Corporate Location 1998. Companies doing business in frontrunner countries also confirmed more strongly that state interference in private business was minimal (WEF. its absence virtually eliminates the possibility of FDI in many industries and countries.A).30 A recent study on administrative barriers to investment in Mozambique highlighted bureaucratic impediments to investment that the frontrunners share with the majority of developing --and sometimes even developed-countries (IFC. 1998a. pp.29 (b) Business facilitation While almost all African countries have recently made efforts to facilitate business and reduce bureaucratic “red tape”. In Uganda. All of the FDI frontrunner countries also received a positive evaluation from companies when it came to dividend remittance policies. Tunisia and Botswana received particularly high marks. Complicated regulatory frameworks.another important policy that can have an impact on FDI (UNCTAD. 32 per cent (649) of the 2. resulting in the payment of fees that represent additional costs for the investor.VI. while most of the companies have been sold to Mozambican entrepreneurs.218). South Africa and the United Kingdom (SADC / FISCU. on average. with the exception of Botswana. there was no major difference between the frontrunner group and others. frustrating companies as they receive little information on how and when a formal approval process regarding their investment project will end. Mozambique and Ghana were the most active in privatization in the group of FDI frontrunners. p. “red tape” remains an important obstacle for investment even in many frontrunner countries. The only exception was Mozambique. 58). • 183 . 1998. government regulations impose less of a burden on business competitiveness in the frontrunner countries than in other African countries. Bureaucratic approval processes are often non-transparent. with their average evaluation again higher than the others’. Survey data in the African Competitiveness Report 1998 suggest that. p. p. about 50 per cent of the equity capital for privatization until 1998 came from foreign sources. These include: • Non-transparency of decision-making processes. Nonetheless.4). 26 Compared to the slow speed of privatization at least in sub-Saharan Africa. with each accounting for more than 100 privatization transactions up to 1997 (see section VI.

p. 184 . which constitutes -.one of the most important factors influencing investment decisions in Africa (Sachs and Sievers. Tunisia also shows up well compared with OECD countries (Kaufmann.31 As to corruption. p.32 Finally. To obtain an industrial licence that allows an investor to operate in Mozambique. 1997.) As to investment facilitation. five of the eight frontrunner countries were represented in the top ten (Corporate Location. 36). 28).39). p. Botswana. Among the FDI frontrunner countries featured in the report. Mozambique and Uganda appear to have the biggest problems with corruption although Uganda in particular has made considerable improvements in recent years (ibid. according to a ranking of the best investment promotion agencies in Africa and the Middle East. Namibia and Uganda) have installed offices of their investment promotion agencies overseas actively to promote themselves in major home countries of TNCs. at least in some respects. Some countries (e. even with the top agencies in the world.g. 1997b. Thus. 1998. According to this Report .37 (c) Economic determinants The FDI frontrunners in Africa vary considerably as regards the economic determinants of FDI. Botswana appears to have the lowest corruption level of all African countries and would even compare with the top half of the OECD countries in this respect. there is some evidence that most of the best agencies of this kind in Africa were located in the frontrunner group. at least 25 separate bureaucratic steps are needed. 1998. on average the frontrunner group appear to be less affected by this problem than the group of non-frontrunner countries featured in the Report. almost all frontrunner countries offered incentives for foreign investors. It is important to note. successful investment promotion becomes a more important determinant for FDI in Africa as the countries on the continent improve with respect to the other determinants. D.35 Uganda’s agency for investment promotion received an award for being the best African investment promotion agency in 199736 and can compare. although determinants themselves vary in importance according to type of investment. p. 1997b) had also established a one-stop shop for FDI by 1996. 51). guaranteed a time limit within which local authorities are obliged to complete screening processes and had programmes in place to train officials in developing a welcoming attitude vis-à-vis foreign investors.34 The investment promotion agencies in these countries also assist foreign investors in obtaining work permits and other licences and all have a process in place encouraging foreign investors to reinvest. While it is difficult to compare the performance of investment-promotion activities and to judge when some of the success in attracting FDI can be attributed to a well-functioning investment promotion agency. in this connection. The costs incurred by companies due to these administrative requirements can be significant. that in general..according to the survey results in the Africa Competitiveness Report 1998 -. Almost all FDI frontrunner countries had established investment promotion agencies33 and all of the frontrunner countries that were included in UNCTAD’s survey of best-practice business promotion (UNCTAD. and at least some of the frontrunners have made considerable progress in the reduction of corruption.Tr World Investment Report 1998: Trends and Determinants • Costly and time-consuming licensing procedures. countries successful in attracting FDI focus their efforts on certain TNCs and certain home countries of TNCs (UNCTAD.

the average absolute FDI flows into the group of oil-producing African countries were. the granting of the right to mine a successful discovery as well as the guarantee of equitable profit repatriation were more important criteria for their investment decisions. as compared to the markets of other developing regions. South-East and South Asia as well as Latin America and the Caribbean more than doubled. Resource-seeking Resource-seeking investment Perhaps more than in other developing regions. A survey among Australian mining companies on the ranking of different exploration and investment criteria for mining in Africa. while that of South. Market-seeking investment Overall. natural resource extraction plays an important role in FDI in Africa and so it is not surprising that the majority of frontrunners are countries with economies dominated by primary products. are conducive to. is held by the United Kingdombased company Lonrho.excluding countries that have received large inflows in the past as reflected by large FDI stock-. Ghana also received much of its FDI in the primary sector and even Tunisia attracted some FDI in the exploration of oilfields and the construction of a gas pipeline to export Algerian gas to Italy (El Hedi Lahouel. that African developing countries possess in sufficiently large quantities to attract FDI. by themselves. there are few resources or assets. 39 Apart from natural resources and tourism. the gross domestic product (GDP) of sub-Saharan Africa almost stagnated between 1980 ($293 billion) and 1995 ($297 billion) . no country on the continent possesses industrial clusters of a considerable size. while recent GDP growth rates for Africa did not exceed an annual average of 2. However. 14). p. particularly for diamonds. at $338 million. the largest Ghanaian gold mine and the first and only genuinely African firm to be listed on the New York and Toronto stock exchanges. much lower than the average for all developing countries. although large endowments of oil or other natural resources are helpful to attract investment. 38 The very fact that there is a large number of natural-resource rich countries in Africa -. especially mineral resources. However. agglomerations of companies in the same industry that could be attractive for foreign investors as providing a pool of a highly specialized experts or workers. they are not. normally sufficient to explain success with respect to FDI in Africa. However. most of the frontrunner countries have put particular emphasis on creating an enabling regulatory environment for FDI in this sector.5 per cent from 1991 to 1997. According to the respondents. p. Equatorial Guinea receives FDI almost exclusively to exploit its rich oil and gas reserves. acknowledging that natural resources are often not sufficient by themselves to attract FDI. For instance. highlights the fact that natural resource endowments. 33 per cent of the stock of Ashanti Goldfields.Chapter VI i. 1997. all FDI frontrunners showed 185 . Africa has lost in attractiveness as a market. Thus. with a few exceptions such as Egypt or South Africa. put an “attractive geology” only in third place (Oestensson. that is.that received much less FDI than the frontrunners during 1992-1996. Also. Since 1994. 6). 1998. such as specific technological knowhow. ii. In sum. natural resources explain much of the FDI inflows into most of the frontrunner countries. during the past two decades. attracting FDI in that sector. Botswana and Namibia have received significant FDI in mining. but not sufficient on their own for.

11.Tr World Investment Report 1998: Trends and Determinants a strong. While the increasing FDI inflows might have contributed to this positive development. in particular in beverages.0 6 179. Entries may not add up to totals due to rounding. Retail Average.4 FDI in particular into SADC area. all Africa a 2. p. in Including South Africa. p. pp. and especially financial services. the positive growth rates were at the same time a reason for the increased appeal of these emerging markets. able avera annual gro verag Tab le VI. 1998. are another area in which most of the frontrunners had attracted some market-seeking FDI. Equatorial Guinea 25. mainly through Namibia 4. 1991-1997 (Per cent) GDP 1996 Country (Millions of dollars) The positive development in GDP growth has attracted some market-seeking Botswana 5.0 Checkers. FDI inflows into Ghana b y sector and industr y. Other TNCs specializing in food processing. b 1997 data are for January . unpublished data. based on Ghana Investment Promotion Centre.0 affiliates opening up in these countries are sometimes accompanied by investment in Sources : UNCTAD.0 Tunisia 4.0 South African chain stores such as Shoprite Uganda 6.10. 34. South African Banks such as Standard Bank have expanded their operations into SADC frontrunner countries.5 19 485. In the SADC region.10). Note : figures are based on project approval data. IDC 1997. Pep Stores or McCarthy. While some of these are related to mining able inflows by industry Tab le VI. front-runner 1996 in recent FDI front-runner countries and all countries Average annual growth rates of real GDP.8 6 345. c Data are for September 1994-September 1997 only.11). 186 .0 4 995. real GDP.5 Ghana 4.4 FDI in the retail sector. Ghana has received 60 per cent of its FDI inflows outside the primary sector since 1995 in services (table VI. above-African average growth in real GDP (table VI.8 3 107. a Does not include mining and petroleum. 1998.0 Mozambique and Namibia have all received Mozambique 6. 1991-1997 and GDP (current prices).3 159. Africa: a vera g e ann ual gro wth rates of GDP.6 4 401. 34. dairy products (Business Map 1998. based on African Development Bank.5 7 290. a food-processing activities. SADC/FISCU. 23)). a 1995-1997 b (Millions of dollars and percentage) Value Primary Primar y Agriculture Secondary Secondar y Manufacturing ertiar tiary Ter tiar y Building and construction Commerce Tourism Other services Total 20 20 75 75 88 14 5 3 67 183 1995 ercenta centag P er centa g e 11 11 41 41 48 8 3 1 36 100 Value 5 5 54 54 199 39 8 2 150 258 1996 ercenta centag P er centa g e a 2 2 21 21 77 15 3 1 58 100 Value 60 60 95 95 454 7 7 4 436 609 1997 ercenta centag P er centa g e 10 10 16 16 75 1 1 1 72 100 1995-1997 c ercenta centag Value Per centa g e 87 87 225 225 749 62 19 7 661 1 061 8 8 21 21 71 6 2 1 62 100 Source : UNCTAD. have also invested in these expanding markets. Botswana.40 Services.September 1997 only. for example.

(which employs 9 people) was founded because Namibia and South Africa are -. other (frontrunner) countries have more difficulties to capitalize on their central location among a number of other countries: an example is Ghana. Sources: UNCTAD. In early 1996.com -.Chapter VI activities. Germany. the affiliate also helps to service the German market by processing customer requests during bank holidays in Germany and processing data related to the books offered by the company. As regional integration is less advanced in Africa outside of the SACU or even the SADC region.the world’s largest online book-order service -. The recent acquisition of the ABC Bücherdienst GmbH by the Seattle-based Amazon. However. 41 There are also some niche-markets. FDI in Namibia and Botswana seems to have been influenced by their membership of the Southern African Customs Union (SACU) through which they have free access to the South African markets. Access to a larger regional market has also been a factor in attracting FDI for some of the frontrunners. p. particularly in services.may have consequences for the Namibian affiliate. in which the frontrunners receive FDI (box VI. leading eventually to a considerable investment in English-speaking staff. they are more noteworthy in the case of relatively small markets such as Namibia or Botswana or LDCs with a low purchasing power such as Mozambique or Uganda. the company began to sell books via the INTERNET and became Germany’s biggest on-line supplier of books. for instance. The Namibian affiliate.important markets for books sold by the company. which has still to make progress on an integration arrangement. 187 . Additional factors influencing the decision to establish an affiliate in Namibia were the availability of German-speaking personnel. in the ECOWAS region.given the significant number of German speakers in the population of both countries -. Although market-seeking investments are common in African countries with larger markets in terms of absolute size and higher GDP per capita levels like Tunisia. In the case of the ABC Bücherdienst GmbH. the company started to expand internationally by creating affiliates in the United States and Namibia.ABC Media Investments Ltd. It is planned that it processes all e-mail transactions. Africa as a location for market-seeking and efficiency-seeking FDI: the case of the ABC Bücherdienst GmbH in Namibia The ABC Bücherdienst GmbH launched its mail-order book business in 1991 in Regensburg. In particular. efficiency-seeking Box VI. the company had approximately 100. therefore. in particular to the South African market.000 customers in more than 60 countries and employed 60 people.2). an affinity for the country on the part of the management in Germany as well as incentives granted by the Government of Namibia in the framework of the country’s “export-processing entity” incentives programme.2. the other important service industry was financial services.9) . based on information provided by the company and the Africa-Association in Hamburg. these included import concessions for computer hardware as well as public subsidies of up to 75 per cent for training courses for local employees. The most recent of these affiliates . not only delivers services to the local market but is also vertically integrated into the firm to reduce costs of personnel for servicing the German market. The Namibian affiliate’s main task is to service the company’s customers in Africa (mainly through e-mail). as the Namibian affiliate would also distribute literature in English. Kenya or Zimbabwe. have both established their assembly plants in Botswana in order to deliver to the South African market and also to tap the emerging car markets of neighbouring Namibia and the Democratic Republic of the Congo (Corporate Location 1994. In 1997. In 1995.42 Hyundai and Volvo. Germany.

1997). supported by liberal trade policies and easy access to the markets of industrialized countries -.12). an uncompetitive transport sector. Efficiency-seeking FDI Except for Tunisia. Tunisia. Botswana and Namibia were among the top ten African countries. including most of the frontrunners. measured by some key indicators for infrastructure (table VI. It had the highest share of manufacturing exports (more than 68 per cent) in total exports for all African countries in the period 1990-1994 and was able to increase its share in global exports in textiles and apparel (Sachs and Sievers. With respect to overall transportation costs. while Ghana.is complex. the policy environment has not been conducive to manufacturing investment for a long time. Thus. Botswana. the lion’s share of these exports are destined for the European Union.). Tunisia and Ghana were the only frontrunners that received relatively high marks on the quality of their telecommunication infrastructure (ibid. to some extent. Morocco.1997).Mauritius. Namibia stand out with values above the African average.infrastructure facilities. another important factor in attracting efficiency-seeking FDI. These findings are supported by the results of the previously mentioned survey reported in the Africa Competitiveness Report 1998. It is thus no surprise that this type of FDI is predominantly located in Mauritius and some North African countries where a relatively favourable policy environment has prevailed over a longer period of time so that the necessary conditions have been put in place. An investment-friendly environment. except for Tunisia (and Botswana judging from its recent FDI in the automobile industry for servicing the South African market). a workforce with skills levels that allow for a timely and cost-efficient production and delivery of goods to overseas markets.12) only Tunisia and. As for the education and skill level of the workforce. 202). Uganda and Mozambique received somewhat lower marks.43 Infrastructure facilities in most of the frontrunners are no better than in most of the non-frontrunner countries.e. none of the frontrunner countries has received efficiency-seeking FDI on a large scale. In many African countries. has been particularly successful in attracting export-oriented FDI into its textile and apparel industries and establishing itself as a production location for these goods in the world market. Lesotho -. typically coupled with unreliable infrastructure facilities and neglected and overpriced telecommunication services. port facilities and inland waterways (WEF. none of the frontrunners owes its recent 188 . 1998a. 1998.40). is of particular importance for transactionintensive activities such as manufacturing (as opposed to natural resource extraction and agriculture) (Collier. to some extent.Tunisia has been able to build up a comparative advantage in some industries characterized by a high labour intensity such as textiles that typically attract efficiency-seeking FDI. The combination of factors necessary to attract efficiency-seeking FDI -. alongside the other countries mentioned. Egypt and. Namibia. Although there are no figures indicating what part of these exports is accounted for by foreign firms. pp. p. Like some other African countries -. conducive to investment as reflected in particular in infrastructure policies as well as in the quality of ancillary public services. it is again only Botswana. i.Tr World Investment Report 1998: Trends and Determinants Efficiency-seeking iii. only Tunisia. 44 Namibia and Tunisia among the frontrunner countries that have educational levels (as measured by school enrolment ratios) that were significantly higher than the African average (table VI. to the extent that it provides no evidence to indicate that the frontrunner countries were on average significantly better regarded by foreign investors in air transport. has made transaction costs far greater in Africa than elsewhere in the world (Collier.

. 18 2. 2. these countries have also received some market-seeking FDI fuelled by the relatively strong growth of their economies in recent years... . Lessons The analysis has shown that even within this relatively small group of African countries a host of reasons can be seen to have allowed these countries to attract FDI in recent years: in the case of Equatorial Guinea it was mainly rich reserves in oil and gas accompanied by a reasonably stable political environment. however.9 6. secondary level 1992-1993 (Per cent) 57 . in particular as regards infrastructure and the skill level of the workforce. annual average 1990 to most recent year a -. Finally..... in particular in the textile and apparel industry.. primary level 1992-1993 (Per cent) 115 .. a “Most recent year” refers. to 1996.6 2.3 Source: UNCTAD.7 78 33 .7 . 1985-1989. .Chapter VI success to attracting sizeable amounts of efficiency-seeking FDI. 1. 1997a. 15. World Bank. based on World Bank. Ghana and also Uganda. 7 59 52 11 Telephone services availability (mainlines over 1000 persons). 1997b. In most frontrunner countries. 60 134 118 67 School enrolment.. 189 . average 1991-1995 40 6 4 5 51 58 2 Road network: 1000 km road per 1 million persons. What are the lessons that can be drawn from this analysis.. 77.. in most cases. Natural resource reserves also played a role in the case of Botswana. in particular for those countries in Africa that have so far been less successful in attracting FDI? There is no single determinant that could explain by itself the recent relative success of the frontrunners. . annual average 1990 to most recent year a (dollars) 152. However. Tunisia has not only attracted market-seeking FDI from investors seeking to explore its own market.12. Considering that it takes time to improve on both of these fronts. are not yet in place... as these countries pursue policies to reduce their shortcomings in these areas.45 3. Ghana. b Average. it is not surprising that countries like Mozambique and Uganda that have gone through devastating civil wars in their recent history trail other frontrunners as well as other African countries in this respect. Privatization has led to considerable FDI into Mozambique. Africa: selected indicator s of the le vel of education and infrastructure facilities in frontrunner for recent FDI frontrunner countries and f or all countries (Percentage and constant 1987 dollars) Government expenditure: real per capita education spending. the conditions.7 .. but also attracted efficiency-seeking FDI. there are already signs that they too can expect a larger amount of efficiency-seeking FDI in the future.7 .. The diversity of the success stories analysed above suggests that the stereotype that African countries can be attractive for foreign investors only on the basis of their natural resources able indicators level Tab le VI.5 28..9 b Country/region Botswana Equatorial Guinea Ghana Mozambique Namibia Tunisia Uganda Average for all African countries School enrolment. Mozambique and Namibia.

The fact that the frontrunner group countries had significantly higher GDP growth rates in the past ten years underlines the importance of growth-oriented policies. the MERCOSUR can have a positive impact on FDI inflows.in particular in the SADC area. apart from the reduction in intraregional tariff and non-tariff barriers.shows that just relying on natural resources is not enough. finally.A. some of the lessons that can be drawn from the example of the frontrunner countries apply to all countries regardless of their specific situations. In other words. As most African countries have a comparatively small market size. foreign investors could respond rapidly to the dynamics of economic development in a business-friendly environment. such integration arrangements could also lead to flows of FDI wanting to take advantage of intraregional division of labour similar to that in Asia. There is evidence of some movement in this direction among frontrunner countries -. All of the frontrunner countries have made remarkable progress in this respect. A stable and predictable framework regarding FDI also encourages foreign investors and. it would take a comprehensive approach that aims at improving investment conditions with respect to all of the determinants mentioned above to increase FDI flows to countries that have been less successful. In the future. As market-seeking investment is still probably lower in Africa than in other regions. Privatization programmes are therefore a potential source for attracting FDI. The example of other regions shows that regional integration initiatives such as. since they not only increase foreign investors’ interest in a newly created large market. Certainly. but the experience of most of the frontrunners -with the exception of Equatorial Guinea -.46 Another lesson that can be drawn. The revitalization of other regional integration agreements in Africa could contribute to an increased inflow of FDI into an increasing number of countries in the continent. Integration efforts have to focus. Mauritius and Morocco. where regional integration efforts to create a free-trade zone among the 15 member countries have attracted market-oriented FDI due to the prospective enlarged market. Thus. is that countries that want to • • • • 190 .Tr World Investment Report 1998: Trends and Determinants is incorrect. a high degree of investment protection is a typical characteristic of countries that have been successful in attracting FDI. Most of the frontrunner countries have at least made a beginning with privatization programmes. Although each country has to define its own strategy. Africa still trails other regions in this respect. As elaborated above in section VI. rich natural-resource endowments continue to be an important FDI determinant for many African countries. as well as other (non-frontrunner) countries receiving significant efficiency-seeking investments such as Egypt. regional integration efforts are critical in attracting more market-oriented foreign investors to Africa. but also foster the overall credibility of policy reforms. on the improvement of intraregional infrastructure facilities to link the often separated markets on the continent. for example. especially from the experience of Tunisia. countries that wish to follow the example of the more successful countries should provide foreign investors with a clear and reliable set of regulations and a comprehensive scheme for the protection of their invested capital. • A stable and predictable policy and macroeconomic environment is an important factor in attracting FDI.

representing significant disincentives for export-oriented foreign firms in these industries. 1998. favourable trade policies have also played an important role in attracting foreign companies into most of the frontrunner countries. The agencies of all SADC countries met in Centurion. p. South Africa. that putting effort into improving investment promotion activities can yield increases in FDI inflows provided that determinants in other areas are also improving. the recent performance of the group of frontrunners discussed here shows that being located in Africa per se does not rule out success in attracting foreign firms. some face the problem of sustaining such flows over a longer time as natural resources are limited in the long run. 1998. In many of the successful African countries. they should also join forces in investment promotion. As African countries step up their efforts to integrate their markets. In addition to a well-educated labour force and a relatively well-developed infrastructure. with high tariff barriers on imports as well as exports. In investment promotion.Chapter VI attract efficiency-oriented investment should reinforce their efforts to improve the education available to their citizens. in many cases. • While natural resources have been among the main determinants for the attraction of FDI to almost all of the frontrunners. In fact. While corruption is a complex phenomenon and often difficult to tackle. Some frontrunner countries have therefore already started to use revenues deriving from the extraction of these resources to fund the creation of other assets. In the case of Botswana. Such agencies as the Uganda Investment Authority have shown that African agencies can compare -. particularly at the primary and secondary levels. these countries stand out among African countries.at least in some aspects -. a simplification of national regulations can make a contribution to reducing the scope of corruption. in manufacturing industries and especially in the apparel and textile industries (Sachs and Sievers. on 26 June 1998 to form a SADC Committee of Investment Promotion Agencies. African investment promotion agencies have still to adopt world-standard best practices. As to corruption. moreover. if they wish to sustain their recent performance over a longer time. *** 191 . What is required is that countries offer a combination of policies. 40). and to the attractiveness of their countries as hosts for FDI” (Sachs and Sievers. • • Even though Africa as a whole has been less successful than other regions in attracting FDI. facilities for conducting business and economic factors that foreign investors find appealing. revenues from the mining industry are strategically invested to build up human capital in the country in order to make the country attractive to other kinds of investment. A first step in this direction is currently undertaken by the investment promotion agencies of SADC. in particular. the facility of a one-stop shop that gives foreign companies quick and non-bureaucratic assistance in all aspects of their investment projects. the majority of which have pursued restrictive trade policies for a long time. 39). All successful countries possess an investment promotion agency that also has. p. The lessons outlined above are relevant for other countries that seek to increase inward FDI as well as for the frontrunners themselves. deregulation was paired with intense investment promotion activities. “African governments that ignore corruption do so at serious peril to their economies.with the most successful agencies in developing as well as in developed countries and.

it also suggests that the measures mentioned above are not always enough for attracting FDI. In addition to further measures at the domestic level. For instance. Among African countries. Its principal aim. Mozambique. Box VI.48 Since many African countries remain heavily indebted. Federation of German Industries (BDI). the reduction of trade barriers for goods and services produced in Africa could contribute to enhancing FDI both directly and indirectly in many African countries. policies designed to attract foreign investment have to be based on a rigorous analysis of the strengths and weaknesses of a country on the basis of the determinants discussed above. Debt relief is another measure that could improve investment conditions in Africa. Additionally. Cote d’Ivoire. historically the development process in Africa has been constrained by factors on the supply side. in Africa. 192 .among other things -. as is being considered under the planned United States-Africa Growth and Opportunities Act. about 30 per cent of German trade with Africa was done with the SADC countries. The Southern Africa Initiative of German Business In May 1996. as everywhere else. Malawi. Botswana. if they could have quota-free and duty-free status. Tanzania and Zambia all stand a chance of developing a textile and apparel industry capable of competing in the United States market.3. Appropriate measures at the overall political and macroeconomic levels have to be undertaken to improve the basic determinants of FDI. Ghana.Tr World Investment Report 1998: Trends and Determinants In sum. Cameroon. with the Republic of South Africa as the most prominent host country.3).47 The same could hold true for other industries and with respect to other developed countries’ markets. as African countries strengthen their capabilities.is to strengthen relations between the 14 member states of SADC and the German business community.. there is also a need for initiatives on the part of the international community to improve investment conditions in Africa.investors’ perception of the investment condition in a country often take some time to change. Moreover. Technical assistance in the areas of basic education and technical training in the upgrading of infrastructure facilities could also make a contribution. and the Association of German Chambers of Industry and Commerce (DIHT) -. the SADC region countries play an important role as trade partners and investment locations for German companies: in 1997. Economic links have been accompanied by development of strong political ties between the SADC member states and Germany. efforts to attract FDI have to include initiatives in a number of areas. the Southern Africa Initiative of German Business (SAFRI) was launched. Nigeria. Although.Africa-Association (AfrikaVerein).. debt relief could help to reduce the pressure on the foreign exchange regimes in these countries and contribute to the relaxation of exchange restrictions in connection with FDI. as agreed by three leading German Business Associations -. more than 70 per cent of German FDI stock in Africa had been accumulated in the region by the end of 1995. measures by home country governments and business organizations to promote investment by domestic firms in Africa could be enhanced (box VI. /. The fact that there are a number of African countries that have improved their policies but do not fall among the frontrunners analysed in this section not only suggests that one has to allow for some time for the policy changes and their effects to show results in terms of a sizeable increase in absolute FDI inflows (some of the frontrunners are only starting to become major recipients of FDI in Africa) as -. thus contributing to an improved regulatory framework for FDI.

the data set for 1997 from the South African Reserve Bank (SARB) used in this chapter represent a revised version of the data as provided in the balance-of-payment tapes by the International Monetary Fund (IMF). Active support of the privatization process in the region in order to improve further political and legal parameters for foreign investment and technology transfer. The organization of fairs and conferences as well as trips by company delegations to bring together potential business partners from Germany and SADC: the concept of SAFRI is based upon the assumption that personal contacts between individual entrepreneurs are pivotal for further establishing trade and investment relations. Source : UNCTAD. the International Monetary Fund in its balance-of-payment tapes publishes strikingly different figures for FDI inflows into South Africa in 1997. meant that the expected return to investment in the oil industry was reduced. essential improvements for the region cannot be expected in the short run. see UNCTAD 1998b. However. combined with political uncertainty. SAFRI also welcomes and supports intraregional liberalization efforts. as this nears completion. • • • With its emphasis on a good investment climate and an improvement in the human capital formation. mean that Nigeria is losing attractiveness as a host country. For an analysis of recent developments in the least developed economies in Africa. which have left income per capita below the level of 1978. these initiatives will be taken in accordance with agreements made with relevant SADC authorities. in particular the SADC initiative to create a free-trade zone among its member states by the year 2008. A weaker demand and lower price for oil were (correctly) forecast as being among the effects of the Asian crisis and the 30 per cent fall in the price of oil. flows are expected to decline. Since its foundation in the summer of 1996.and resource-seeking investors.3. forthcoming. SAFRI also considers vocational training schemes to set up SAFRI-sponsored training in the region. SAFRI concentrates on some of the most pivotal factors for attracting FDI into the region. According to the IMF. as this could increase the region’s attractiveness for market. concepts and visions (the first SAFRI-SADC private business conference will be held in October 1998). FDI inflows into South Africa fell for a second consecutive year. 193 . Investment had been increasing in the Nigerian manufacturing sector in the late 1980s but the stagnation and then fall in Nigerian GDP per capita since 1993.Chapter VI (Box VI. In order to facilitate business-to-business contacts between German and African counterparts. concluded) SAFRI’s activities include: • A human resource development initiative for the SADC region: SAFRI organizes business-oriented panels that bring together entrepreneurs from southern Africa and Germany for an exchange of ideas. based on information provided by the Africa-Association.a virtual market-place on the Internet that enables visitors from all over the world to make contact with German companies doing business with and in Africa. the Africa-Association has established its “Africa Business Platform” . SAFRI has had broad media coverage both in Germany and the SADC states and provides a good example of increasing private sector initiatives to promote interest in Africa as a business location. Differences in the FDI data for earlier years as reported by the SARB and the IMF derive from differences in the definition of FDI by the two institutions. Notes 1 2 3 4 Much of the FDI inflow into Lesotho in recent years has been for the development of the Lesotho Highlands Project. these measures are considered long-term investments by SAFRI. However.

“Privatization process is taking much longer than expected”. 14. Simonian. Virtually the same indicators were used to identify frontrunners in UNCTAD. however. has limitations: • One limitation of the method is that a country that already has a high ratio on a particular indicator might be excluded from the frontrunner group because that might make it more difficult for it to attain an above-average improvement. The methodology used. the interlinkage between trade policies and FDI is ambiguous. 14). p. Includes South Africa. Seychelles. Financial Times. but received rapidly increasing flows in the second period (1992-1996) would have very high values for the growth rates on all of the four flow indicators described in the text. These figures do not correspond to the figures by the South African Reserve Bank given in the text because of different definitions of FDI. These countries are Angola. 15 achieved a GDP growth rate of 5 per cent or more in 1997 (United Nations. 1995b. some of the frontrunners already had. Lesotho. 1998. FDI unrelated to privatization accounted for inflows of $2. • A second factor to be considered is that a country that received virtually no flows in the period 19871991. Mozambique. above-developing-country-average values for certain indicators. Zambia and Zimbabwe.5. Hyperinflation in some civil-war-ravaged economies. Of the 38 countries that are regularly surveyed by the United Nations Department of Economic and Social Affairs. p. 12. “Morocco to seek foreign investors”. Malaysian investors. p.Tr World Investment Report 1998: Trends and Determinants 5 6 7 8 9 10 11 12 13 14 15 16 17 18 According to Business Map. There is some evidence to suggest that a rapid liberalization process in the framework of 19 20 194 . Malawi. for instance. In most cases. Namibia. The decline in the share of services in FDI into Africa in the period 1989 to 1996 is largely matched by an increase in the share of the category “unallocated” that includes holdings and other FDI in non-specified sectors that is not shown in figure VI. 1997. like any other method to assess performance. However. In some cases. Furthermore. a private source of information on FDI into South Africa. as trade liberalization in general does not always have immediate positive impact on FDI. the United Republic of Tanzania. rapid liberalization might lead companies that had undertaken investment to overcome the existing trade barriers to divest. p. Swaziland. and M. as explained. suggesting that there is no systematic bias against countries that already had a high value for a particular indicator in the earlier period (1987-1991). 20). As of June 1998. Libyan Arab Jamahiriya. R. Malaysian firms have been partners in Zimbabwe’s biggest power station and also in forestry (both in 1996). H. Africa with investment in Delta”. an above-developing-country value. Mauritius. Egypt and Nigeria were the only African countries that received above-developing-country average flows during 19921996. that had become the second most important source of FDI inflows into South Africa in 1996 and 1997. as well as drought-induced increases in food prices and wages in some countries. Chinese FDI stock is very limited. 1998a. are the main factors behind the rise in the inflation rate for 1997 (United Nations. The survey criteria for the selection of companies changed during the period. Uganda was the only African country that recovered strongly enough from a situation where FDI inflows had almost ceased to fulfill the frontrunner requirements. 1998a. Financial Times. p. a country would only qualify if it had reached.8 billion in 1997 (Business Map. 22 June 1998. p. Thus. as it spreads over 20 African countries. Botswana. 20). this may also indicate a lack of dynamism. seem to have scaled down their plans for 1998 because of the Asian crisis (Business Map. even though absolute inflows may be low. However. 1998). although there are African countries that received almost no inflows in the period 1987-1991 but had slightly higher inflows in the period 1992-1996. Democratic Republic of Congo. for at least one indicator. 11 December 1997. 3). not exceeding $5 million (Fujita. FDI from China is a notable exception. SADC members are Angola. 31 March 1998. Khalaf. Also.1 billion in 1996 and $1. It should be also emphasized that the analysis of the sectoral distribution of FDI flows to Africa as a whole suffers from the fact that data are scarce and that it has mainly to rely on the information provided by selected major home countries. South Africa. Tony Hawkins. Ashurst. Egypt. in “GM returns to S. Financial Times. in the period 1987-1991. Morocco and Nigeria. However.

Ghana and Tunisia -. 1997b). Cote d’Ivoire. The following analysis is based on the findings of the study and therefore refers only to Botswana.3 billion in sub-Saharan Africa. 38). In another survey conducted by the European Round Table of Industrialists (ERT. ii).22. The five frontrunner countries for which data are available accounted for $623 million or 27 per cent of the total privatization value of $2.) Thus. Ethiopia. Tunisia and Uganda. Some of the tariff rates entered in the table might have changed significantly in recent years. The frontrunner countries included in the survey reported in the Africa Competitiveness Report 1998 are Botswana. The countries were: Botswana. p. The large number of privatizations in Mozambique is partially explained by the privatization of many small units and retail outlets (Bennell. However. The “Best African Investment Promotion Agency Award” event is organized jointly each year by the company Corporate Location in collaboration with Coopers & Lybrand. Equatorial Guinea and Namibia all accounted for very few privatization transactions. more than 20 per cent of the executive’s time has to be devoted to these activities. No information was available on investment promotion in Equatorial Guinea... Namibia. market size and wealth of the country. p. while in Ghana. the two FDI frontrunner countries covered -. Some of these countries have only recently started to push privatization forward more decisively. while in Namibia and Botswana it takes only a small fraction of a senior executive’s time to negotiate with officials in obtaining licenses.135). United States would be just $100 (IFC. the resources of the investment promotion agency. p. Malawi. and the overall competitiveness. Tunisia was one of the four top-ranked countries with “very open” investment conditions. in Tunisia it takes 10 per cent of the senior manager’s time. Mauritius. 1998. as reflected in relatively higher FDI stock indicators. 1998. Morocco. Tunisia and Uganda. Namibia. 195 . while the cost of the same procedure in the state of Maryland. It is not surprising that most of the frontrunners have concluded considerably fewer such treaties than non-frontrunners (like Egypt and Mauritius) that have a longer history of receiving FDI.Chapter VI 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 adjustment programmes in some sub-Saharan countries may have contributed to divestment by foreign firms (Bennell 1997a. Mozambique. According to Atingi-Ego and Kasekende of the Bank of Uganda: “. For a detailed analysis of the national FDI codes of Mozambique and Namibia see Mutharika (1997). Kenya. as a consequence of the Uruguay Round negotiations under the General Agreement on Tariffs and Trade (GATT). The assessment is based on a combination of the results of a questionnaire completed by a senior manager within the agency and the findings of a questionnaire completed by several representatives of organizations that advise investors and know how the agencies are perceived by investors (Tillett. not all frontrunners were active in privatizing in the period until 1998. while Ghana was evaluated to be “quite open” and thus having reached the second highest category on the ERT benchmark. The list of non-frontrunner countries that received a negative assessment on this point included a much longer list of countries such as Cameroon. Botswana. Nigeria. Ghana. Furthermore. Tunisia and Uganda. The ranking was based on three performance criteria -. FDI inflows have been largely associated with the privatization programme [. p. the cost of obtaining a commercial registration for an investment of one million dollars in Mozambique can be up to $50. South Africa and Zimbabwe. Tunisia does not have such programmes.. According to the study. Namibia. 1996. 1996. Botswana has not yet signed the Paris Convention for the Protection of Industrial Property as administered by the World Intellectual Property Organization (WIPO).the number of projects attracted. for a brief description of the FDI framework in Botswana see SADC / FISCU. regulations or permits.000.while taking into account the incentives offered to companies. The same holds true for the share of frontrunner countries in the value of the transaction. 1997)..]” (Atingi-Ego and Kasekende.were both evaluated as countries opening up in terms of their investment regulations with a high average speed in the period 1993 to 1996. DTTs are often only established between countries once there is a critical mass of foreign investment. total capital investment and the number of jobs created -. Mozambique.

For a discussion on the potential role of debt relief in restoring self-sustained economic growth in subSaharan Africa. In this connection. South Africa and Swaziland. 26). p. liberalized trade and investment between African countries and the European Union and the United States are likely to result predominantly in trade integration as opposed to investment integration as long as the markets of the individual African countries are largely separated from each other (Wangwe. p.7 billion in investment by a consortium composed of South Africa’s Billiton. “High rates choke investment”. p. Namibia. 22). as there is evidence that this substantially increases the positive effects of integration for the participating countries as contrasted with just trade-based integration (Wangwe. United States International Trade Commission 1997 as cited in Sachs and Sievers. Lesotho. Part Two. The urgency to make progress in the internal integration of African markets has to be seen also in the context of liberalization efforts vis-à-vis countries outside the continent. policy makers need to be aware that regional integration efforts should encourage cross-border FDI within the region. p. highlighting the ability to repatriate profits. p. 1998. 196 . 16).Tr World Investment Report 1998: Trends and Determinants 37 38 39 40 41 42 43 44 45 46 47 48 Tillett (1996) gives an overview of best practice indicators (annex table A. A further factor increasing the transaction costs is poor law enforcement.VI. Tunisia received significant inflows in the tourism industry. 1997). Low electricity costs were another key factor (Corporate Location 1998. chapter 1. 1997.including the “Dutch disease” hyphothesis.4). according to which the large exports of natural resources push the exchange rates of many African countries upwards. and consistency as well as constancy in minerals policies (Oestensson 1997. Mozambique has attracted $1.6). see UNCTAD. including the reconstruction of the transport infrastructure between the Johannesburg/Gauteng area in South Africa and Maputo in Mozambique. It should be noted that. 22 June 1998.4). making other products less competitive (Collier. Corporate Location. in Financial Times. Another example of this is South African Breweries setting up new facilities or acquiring existing ones in Mozambique and in Uganda (IDC. FDI in the automobile industry of Botswana. the government-owned Industrial Development Corporation of South Africa. The latter efforts can only come to full fruition for African countries if intra-African liberalization progresses more quickly than that with external partners. However. The decision was significantly influenced by the plans of the South African and Mozambican Government for the Maputo Development Corridor. 1998. a sector which is to a considerable extent just as location-bound as natural resource extraction. Botswana has over the years pursued a stringent policy of raising educational levels in its population and workforce by using revenues from the diamond industry to enhance human resource development (Corporate Location. mentioned earlier. apart from the “transaction costs” approach. 23). in particular developed countries. pp. SACU members are Botswana. Mitsubishi and the Government of Mozambique as a minor shareholder to build an aluminium smelter near the deep water port of Maputo. 127-130. 1997. 1998. Tony Hawkins. 1998a. to cater for the South African market reflects the potential in that country for efficiency-oriented FDI. Other surveys confirm the crucial importance of an appropriate regulatory environment. p. the guaranteeing of management control. p. there are also other theories to explain the poor performance of the manufacturing sector in Africa -. Thus. 1997. 41.14. p.

Within the region. Trends Despite the financial crisis affecting a number of East and South-East Asian economies. the Philippines and Thailand). however. Inflows to that subregion increased by 5 per cent over 1996 to a total of $78 billion.1). Furthermore. an overwhelming proportion of the region’s inward FDI was directed to East and South-East Asia. the Republic of Korea.1). However. a sharp increase in Thailand. and no change in the Republic of Korea (figure VII. The region accounted for 57 per cent of flows into developing countries and over half of their FDI stock. FDI approvals for these five countries together increased from $29 197 . FDI varies as a proportion of both gross fixed capital formation and GDP. of course. overall inflows remained at a level similar to that of 1996. foreign direct investment (FDI) in Asia and the Pacific rose by about 8 per cent to an estimated $87 billion in 1997 (annex table B. lower than that of the previous year (17 per cent).1). 1998a). to a lesser extent.2 and VII. Even in the five Asian economies most affected by the crisis (Indonesia. Malaysia. The FDI stock in the region reached $596 billion in 1997.3). despite the financial crisis in Asia which erupted in July 1997 (UNCTAD.3).1). The growth rate of FDI in 1997 was.Chapter VII CHAPTER VII PA ASIA AND THE PACIFIC Trends A. an increase of 17 per cent over 1996 (annex table B. This is mainly because a number of major host countries in Asia have relatively large domestic economies and/or high ratios of domestic investment to income. There were moderate decreases in flows into Indonesia. Malaysia and the Philippines. As in the past. both the region’s FDI inflows as a percentage of gross fixed capital formation in 1994-1996 and its FDI stock as a percentage of gross domestic product (GDP) in 1996 were slightly lower than the corresponding averages for all developing countries (figures VII. This was largely because flows increased to China and. to Singapore and Taiwan Province of China by a total of some $5 billion in 1997 (figure VII. led primarily by increased flows to China (figure VII.

China. Singapore. FDI has become the single most important source of private development financing for the region. Flows into these economies taken together reached a record $17 billion in 1997. With a slight increase to $10 billion in inflows in 1997 -.Tr World Investment Report 1998: Trends and Determinants billion in the first half of 1997 to $32 billion in the second half of 1997 (table VII. both of which declined sharply in 1997. Asia and the Pacific: FDI flo ws into the arises as to whether the flows top 20 recipient economies.1). same economies. The country continued to maintain its position as the second largest FDI recipient in the world and the single largest among developing countries. (See section B below for further discussion. for a number of reasons quite apart from any that might be related to the financial crisis (box VII. no doubt because it generally represents long-term interests in its host economies. the question Pacific: flows Figure VII. it is worth noting that the share of FDI in total resource flows to East and South-East Asia has increased remarkably in recent years. Since China’s FDI boom has now lasted for six consecutive years.twice as much as FDI flows to the entire African continent -- • Source : a UNCTAD. 1996 Indications are that there may well be a decline in FDI flows. It was second (after Singapore) among Asian countries in FDI flows relative to gross fixed capital formation in 1994-1996 (figure VII. compared to 27 per cent in 1996.1). and is likely to be particularly important for the economies most affected by the crisis. FDI was thus much less volatile than portfolio capital flows and commercial lending. 198 . China (with new record inflows of $45 billion) again accounted for over a half of the flows into Asia and 11 per cent of the world total. Indeed. 1996a).2). Ranked on the basis of the magnitude of FDI inflows in 1997.1. from 10 per cent in 1990 to 53 per cent in 1997 (World Bank. a 1997 and flo ws to the boom will continue. the performance of individual economies has varied: • As the frontrunner. even if it should decline to some extent in the short-to-medium term.) In this context. and since there has been a financial crisis in Asia which could have some spillover effects on China. The newly industrializing economies of Asia (Hong Kong. 1998). FDI/TNC database. Within the overall trends in FDI flows into East and South-East Asia. Republic of Korea. as predicted in 1996 (UNCTAD. and Taiwan Province of China) achieved a modest combined FDI growth of 6 per cent in 1997.

per centa g e of gr oss fix ed capital formation. Source : a UNCTAD. 1994(annual avera verag 1996 (ann ual a vera g e) (Percentage) FDI flows to S o u t h A s i a ro s e t o another record level of about $4. for example.2.1).Chapter VII Singapore remained the single largest recipient among the four economies and the second largest in the subregion (figure VII. less than the flows. Flows into the other economies in South A s i a re m a i n l o w. Asia and the Pacific: FDI inflo ws and outflo ws as a Pacific: inflows outflows percenta centag gross fixed formation.3). to Chile. Those to Pakistan. the Philippines. Thailand and Viet Nam (the “ASEAN 5") remained at a level similar to that in 1996. FDI/TNC database. Malaysia. India attracted $3. Singapore also ranked at the top of the region’s countries in the ratio of FDI stock to GDP (figure VII. while flows into Taiwan Province of China increased. India’s potential for inward FDI remains sub-stantial. their growth hampered by structural bottlenecks and a further slowdown in economic growth. and accounted f o r a b o u t t h re e quarters of total flows into the subregion.3 billion in 1997. Flows into Hong Kong. While flows into the other four declined. although Thailand was the first Asian country to be stricken by the crisis. those to Thailand increased by over a half. China and the Republic of Korea remained at a level similar to that of 1996. mostly reflecting an increase of about 37 per cent in flows into India.4 billion in 1997.3 billion in 1996. have remained stagnant for several years. • Total flows into Indonesia. reflecting both the substantial flows it has sustained over time and the relatively small size of its economy. Figure VII. the second largest recipient in South Asia. 199 . as compared with $3. Top 20 economies ranked on the basis of the magnitude of FDI inflows as a percentage of gross fixed capital formation in 1994-1996. a top 20 economies.

Kazakhstan and Azerbaijan were by far the most important recipients. Asia and the Pacific: inwar d and outward FDI stoc k as a committing over $4 percenta centag GDP. ferrous and non-ferrous minerals).Tr World Investment Report 1998: Trends and Determinants FDI flows into the eight Central Asian economies increased for a fifth consecutive year. Top 20 economies ranked on the basis of the magnitude of inward FDI stock as a percentage of GDP in 1996. 200 . Pacific: inward outward stock Figure VII.investment is lagging in the region. For example. While FDI was particularly attracted by the openness of the Central Asian economies. the United Kingdom and China. from a level of some $300 million in 1996 to 1.3. The Republic of Korea was the largest investor in the region (although some divestment by Korean firms took place at the beginning of 1998) followed by the United States. top 20 economies.9 billion in 1997. other than oil and gas. FDI flows into the region fell short of the levels of the early 1990s. investors from China and Indonesia concluded some large deals in early 1997. such as the low transparency of privatization programmes. particularly in natural resources. gas.4 billion in 1997. per centa g e of GDP. FDI prospects for the short and medium term remain bright.1 F l o w s i n t o We s t A s i a i n c re a s e d b y a multiple of six. agriculture and agroprocessing. such as petrochemicals. reaching $2. 2 ) . Nonetheless. accounting for nearly four-fifths of the total flows into the subregion. the unreliable information on investment projects. the inconvertibility of currencies. The potential for FDI flows exists in a number of areas. in Kazakhstan. 1997c) -. and despite active efforts by countries -through offset programmes ( b o x V I I . Source : a UNCTAD. Even so. 1996 a billion each to oil and natural gas projects. Most comprised resource-seeking FDI (oil. the uncertainty in legal matters and. Nevertheless. tourism and infrastructure. having turned positive (in 1996) after divestments exceeded investments in 1995. often attracted by privatization programmes. t h e p ro motion of intraregional j o i n t v e n t u re s a n d i m p ro v e m e n t s o f t h e FDI climate (UNCTAD. FDI/TNC database. in some countries. it still faces many problems.

0 56.0 1..9 1.8 4.6 5.0 0.2 47.4 0.4 45. .9 3.8 66.4 20.6 b Memorandum: South.9 7.5 1. insurance.6 61.0 1. .fir st quar ter of 1998 (Billions of dollars) 1997 1990 1991 1992 1993 1994 1995 1996 1997 Q1 Q2 Q3 Q4 1998 Q1 Country Countr y a a (balance-of-payments (a) Actual FDI (balance-of-pa yments data) Indonesia Korea. 21.5 2..0 25.8 2.0 1.2 ——- 3. non-bank financial institutions and leasing.3 16.2 2.2 0.2 2.8 .4 —— 1.8 1.3 0.0 2.9 37 39.3 0.7 —— 32..9 5.3 10.2 22.8 14. Appro (b) Appr oved FDI Indonesia c Korea.2 1.9 16. Republic of Malaysia d Philippines Thailand Total for the above countries 8. 0.6 40.2 10.3 10..6 . Not including FDI in oil and gas. Republic of Malaysia Philippines Thailand Total for the above countries 1.3 27. 1.2 2.5 63..3 33. 8.3 0.3 4. .1 1..2 1.1 —— 29. 0..6 0.5 4.4 —— 2.3 0.5 58.. 0.1 6.able inflows affected by first quarter Tab le VII.3 1.0 0.2 .9 29.3 1.8 43.1 2.0 28.1 3.8 —— 16.8 19.3 1.8 77.6 16.3 0.1 10.8 5.9 ..2 1.0 0.7 5.0 0.8 6...4 2.8 82.4 0...0 8. 0.5 2.3 3.7 1.5 1. 0.1 0.5 .6 1.5 7.3 7.8 7.5 8.3 .0 13.2 6.3 3.0 9. East and South-East Asia 20.5 35. . 1990. banking. Chapter VII 201 .9 3.6 35.5 0..0 2.4 36.8 0.6 . 0.3 23.4 0.3 0.6 Source: UNCTAD.2 0.7 1. FDI inflo ws into the Asian countries most aff ected b y the financial crisis.3 4. Preliminary data.4 2.5 2.5 1.5 2.0 . 7.7 2.3 16.5 17. 10.4 27.3 1.2 4.7 1...8 0.2 4.1 3.3 0.1 0.4 6.3 —— —— 17.3 1.0 22.6 1.3 4. Manufacturing only. East and South-East Asia China Share of the five most affected countries in total for South. .3 0.8 10.1 1.4 .7 33.4 1.7 6.6 . FDI/TNC database.1 8.1.8 . .8 0..8 1.8 2.5 3.6 2.. .4 2.5 1. 1.7 11..8 4.8 5.2 1.6 .2 0.8 ..2 4. a b c d Excluding reinvested earnings.5 2.3 10.6 21.2 2.0 4.

a major change in FDI inflows may have wide-ranging consequences for the Chinese economy. The relevance of this question is twofold. Box figure 2. S l o w d o w n o f e c o n o m i c g ro w t h . FDI flows into China. its export-oriented strategy and successful penetration of world markets.the so-called “flying-geese” pattern (UNCTAD.investment of the recent past has resulted in excess capacity in a number of industries. it is below the double-digit growth of earlier years. chapter V). since China has become the single largest FDI recipient among developing countries and the second largest recipient worldwide (annex table B. would be depressed by weaker demand in China. to about 7 per cent.1. considering the position of FDI in both gross fixed capital formation and GDP in China (among the highest in the world). as approvals have been declining for some years. textiles and clothing. the liberalization of its inwardBox figure 1. including the country’s large and continuously growing domestic market. FDI tends to be positively correlated with GDP growth. 1995a. t h e r a t e o f g ro w t h o f F D I inflows has slowed in recent years. t h e d e c l i n e i n approvals by 20 per cent in 1996 and 30 per cent in 1997 may be followed by a decline in actual inflows in the short-to-medium term. developments with respect to FDI in China will have a sizeable impact on FDI trends in Asia and the developing world generally. The capacity of such industries to /.8 per cent in 1997). 1998). Assuming a lag as in the past between current approvals and f u t u re i m p l e m e n t a t i o n . Source : UNCTAD FDI/TNC database. and other light industrial products.Tr World Investment Report 1998: Trends and Determinants Box VII. reduced economic growth in China can be expected to have a negative impact on FDI inflows. The boom has been fuelled by various factors. GDP projections point to a further slowdown. Is the current FDI boom in China over? China has experienced an unprecedented boom in FDI inflows over the past six years. Experience suggests that increased approvals precede increases in actual FDI. and selected regions in world FDI inflows. FDI in China’s industrial sector will be the first to be affected by worsening demand. in particular. Share of China. H o w e v e r. Second. such as some consumer electrical and electronics products. a It may turn out that the massive -. More importantly. Excess capacity . 1997 To the extent that FDI approvals are indicative. from an average of 165 per cent in 1992-1993 to 17 per cent in 1994-1995.. falling from $111 billion in 1993 to $52 billion in 1997 (box figure 1). t h e s p i l l o v e r e ff e c t s o f industrial upgrading in neighbouring economies -. in 1997. Source : UNCTAD FDI/TNC database. 1991-1997 F D I re g i m e . they do suggest that actual flows may decline in the coming years.1 and box figure 2). it declined further to 11 per cent. with inflows reaching $45 billion in 1997 (box figure 1). as well as the low level of FDI stock relative to the size of the economy until recently. Various developments in pull and push factors for inward FDI in China suggest that such a prediction is plausible.. Although GDP growth has remained high in China (at 8.foreign and domestic -. Hence. 202 . Marketseeking FDI. First. in 1998 and 1999 (ADB. This slowdown raises the question of whether the FDI boom in China is nearing its end.

TNCs’ relocation of investment from China’s coastal regions to the interior has not been significant. Competition in the coastal area for sales in the domestic market is becoming more intense and. At the same time. A significant decline of flows from other Asian economies to China can thus be expected in 1998 (see section B). export growth is indeed likely to slow down. especially to the South-East Asian countries currently affected by the financial crisis. accounting for 80 per cent of China’s inward FDI stock. 1998). that FDI flows are an incremental measure. the demand for labour-intensive products in these markets is likely to decline if expectations of an economic slowdown in the world economy turn out to be correct. This suggests that the “gold rush” by investors into certain manufacturing industries in China may be coming to an end. from which labour-intensive industries in China have benefited in the past. Singapore. When China emerged as a major host country for FDI. its indirect repercussions are as yet unclear. even if a host country continues to have a relatively high rate of economic growth. the potential of exporting from China is constrained by trade barriers in major export markets (import quotas. 203 . /. other things being equal. however. It should be noted. FDI in China has mainly come from within the Asian region.1. This could break the flying-geese pattern of industrialization in Asia. to move to other low-income countries where transportation costs are lower and infrastructure more advanced than in China’s interior provinces. The pressure on profit rates stemming from excess capacity and increased competition could reduce the incentive for the latecomers among TNCs to undertake new FDI. however. it cannot be expected that they will grow forever at the same rate. Japan. even though they remain internationally competitive. In the short run. et al. Reduced outward FDI from Asian neighbours . rather. b With regard to total exports. a few domestic firms are emerging as strong competitors. to what extent the approvals in 1996-1997 will be realized. • • These problems could not only discourage efficiency-seeking FDI in China but also affect the country’s impressive export performance. If they are serious. Several factors have played a role in creating a new set of conditions. Taiwan Province of China. Declining locational advantages for efficiency-seeking FDI . TNCs have preferred. To sum up. The recession in Japan is of particular relevance here. China’s price competitiveness in international markets has been reduced vis-à-vis that of a number of South-East Asian countries which recently devalued their currencies.. FDI in China will probably decline in the short run. to the increase in stocks and play an important role in the host economy (box table 1). in addition to foreign enterprises. As long as flows fluctuate around a relatively high level. anti-dumping provisions. representing additions to a stock of assets for production. most investment went into labour-intensive export processing operations. Thailand and Malaysia rank among the top investors. the Republic of Korea. China.. In addition. various structural weaknesses may come to the surface and erode investors’ confidence in the short and medium term. • • Wage increases. a decline in annual growth from 20 per cent in 1997 to 3 per cent in 1998 and 1999 has been forecast (ADB. and if the country’s economic growth slows down considerably. For certain labour-intensive products. particularly in China’s coastal areas where FDI is concentrated. established TNCs are likely to postpone sequential FDI unless a reasonable balance between demand and supply is restored. given the current constraints on outward investment facing some of these countries. in which FDI has been concentrated. Despite special efforts by the Government. continued) absorb further FDI inflows may thus be limited in the next few years. Hong Kong. The share of these countries in approved FDI in China in 1996-1997 is also high. they contribute. are eroding incentives for TNCs to establish labour-intensive export processing operations. It is questionable.Chapter VII (Box VII. Although the financial crisis in Asia has not directly affected China.). This is true especially of industries in the coastal area.

(Box VII.0 Number of employees in foreign affilliates (million) 4.8 Tax contribution as share of total (per cent) . 204 . The latter have traditionally been underrepresented (see section B.5 13.4 FDI inflows as a ratio of gross domestic investment (per cent) 3.0 . All these considerations mainly concern the short to medium-run FDI prospects. Furthermore.1 18. The liberalization of FDI policies is still under way.0 10. 1995 35. reducing the role of firms from neighbouring Asian countries and increasing that of TNCs based in Europe and North America.16) in China as compared with other developing economies and can be expected to respond to available favourable investment opportunities. important promotion efforts include a comprehensive Investment Promotion Action Plan adopted at the second Asia-Europe summit meeting. based on information provided by China. are now taking an active interest in the region.3 13. European TNCs.0 Share of industrial output by foreign affiliates in total industrial output (per cent) 5.0 10.0 . 1997 45. In the longer run. transportation.8 46. 1996).9 31.4 7.7 28. their absorptive capacity for FDI is limited.6 17.6 Exports by foreign affiliates (billion dollars) 12. the Pacific island economies experienced a modest gain in FDI flows in 1997 after a sharp decline in 1996. FDI/ TNC database. The subregion experienced a negative growth rate of GDP in 1997 (ADB.7 10.4 20.2 25. 75.1.2 FDI inflows (billion dollars) 4.0 1996 40.0 14.0 16.5 41.. The sources of future FDI inflows will probably shift to a certain extent. 1991-1997 Item 1991 1992 11.. in particular.Tr World Investment Report 1998: Trends and Determinants Finally.4 6. concluded) Box table importance Box tab le 1.0 6.2 27. Some industries closed to FDI in the past are being opened up gradually. Thailand and the Republic of Korea. The impor tance of FDI in China..2 On the other hand. Source: UNCTAD. governments of the European Union countries and the Asian countries have been actively promoting investment flows between the two continents. figure VII.5 9. New trends may be emerging in Asia and the Pacific with respect to the sources. a significant potential exists for foreign investors to participate in building infrastructure and restructuring state-owned enterprises..8 15.7 11. The current financial crisis provides some immediate opportunities for European firms to enter the Asian market or expand existing operations (Section B).2 7. a b The growth of industrial production is expected to decline from 12 per cent in 1996 to 7 per cent in 1999 (ADB.. These factors should also mitigate any slowdown that occurs in FDI in the short to medium term.0 4. Ministry of Foreign Trade and Economic Corporation and UNCTAD. On the one hand.8 17. particularly those from Malaysia. China’s growth performance is expected to be high by regional and world standards.1 1993 27. liberalization is continuing in such service industries as telecommunications. 17.0 .0 24.0 18. The share of FDI from outside the region is increasing in total FDI in Asia and the Pacific. banking and insurance. the financial crisis in Asia has reduced the capacity of Asian TNCs.5 12.3 17.0 . Lower growth forecasts notwithstanding.1 17.8 17. 1994 33. Source : UNCTAD.9 FDI stock as a ratio of GDP (per cent) 5. Given the narrow production base characterizing the island economies. electric power.8 . 1998) and the inflows of $400 million were still below the 1995 level of $600 million.1 Share of expor ts by foreign affiliates in total exports (per cent) 17. China can be expected to remain an attractive location for FDI.0 41. and retail and wholesale trade. having largely neglected Asia until recently (European Commission and UNCTAD.3 14. 1998). the sectoral distribution and the mode of entry of FDI: • Decline of intraregional FDI. Furthermore.7 61.6 34.. Exports to these countries accounted for about 15 per cent of China’s total exports in 1996-1997.

For example. insurance and telecommunications. and Aircraft Accessory and Component -. China. a French defence company. into the offset programme in 1994. employment and a boost for the domestic private sector. also has similar obligatory investment projects (Japan. The programme as originally conceived required foreign suppliers of arms and aircraft to make an investment in the buyer country amounting to an equivalent of about 30 per cent (exact figures depend on specific projects) of the technology-related products and services provided by them in return for the contract they obtained. FDI through offset programmes in West Asia • Offset FDI programmes refer to programmes requiring foreign suppliers (exporters) of large volumes of specific goods and services to invest in the importing country. International Systems Engineering ($17 million). expanding their scope. The duration for undertaking the investment is about 7-10 years following the supplies of arms and aircraft. is to invest £1 billion in return for selling aircraft and has already established two out of seven proposed affiliates -. Middle East Propulsion Centre ($60 million in phase one and $118 million in phase two) (Japan.Chapter VII to invest elsewhere in the region. This was confirmed by a survey of leading TNCs conducted by UNCTAD/ICC in March 1998 (UNCTAD. based on information provided by the Japan Institute of Middle Eastern Economies. this is because the sector is being liberalized. Institute of Middle Eastern Economies. An increasing share of FDI flows to the region is directed towards the services sector.g. a company that won the contract for Peace Shield II and established Middle East Batteries Co.2. such as the United Kingdom and France.4). Fryma Fabrics). 1998). Al-Salam Aircraft Co. and cross-border M&A transactions as a percentage of FDI inflows reached 15 per cent (figure VII. Similar examples exist for other supplier countries: a United Kingdom firm. ($115 million). particularly banking. The restructuring of certain service industries in some of the countries affected by the crisis has also opened up opportunities to foreign investors. The number of host countries pursuing such programmes has also grown. The affiliates established are not necessarily confined to the arms industry (e. ($50-60 million). whether through unilateral initiatives or through the framework of international agreements. as suggested by the presence of local partners in many of these investment projects. The first offset programme involved Boeing Aerospace and General Electric in Saudi Arabia. FDI in Saudi Arabia through this programme also came from Hughes (United States). moreover. Aircraft Accessories & Components Co. Offset FDI is seen by the governments involved as a means to obtain technology.Saudi Development and Training Co. Thomson-CSF. In part. The development strategies of some economies -Hong Kong. Institute of Middle Eastern Economies. British Aerospace. Source : UNCTAD. While this share is offset West Box VII. The governments that have offset programmes are. in return. Offset programmes have now been expanded to include firms from other countries as well. and Taiwan Province of China -. The first such programme was initiated in 1984 by Saudi Arabia and the United States. Mode of entry.for attracting regional headquarters of TNCs and strengthening them as regional hubs have contributed to this process as well. under the Peace Shield Offset Programme. Majority M&A sales in Asia to foreigners in 1997 more than tripled in value over 1996 (from $4 billion to $13 billion). a United States telecommunications firm. 205 .under the Al Yamamah Economic Offset during 19881989. Singapore. ($160-170 million). 1998f). • Sectoral distribution. 1998). these two companies made investments valued at about $600 million in five projects: Advanced Electronics Co. the programme in Saudi Arabia has been extended to the non-military area by bringing AT&T. Mergers and acquisitions (M&As) are becoming more important as a mode of entry for FDI in Asia and not only in the economies most affected by the crisis.

3 The expansion in China’s outflows was led mainly by resource- Source : UNCTAD. for example. FDI inflo ws.Tr World Investment Report 1998: Trends and Determinants almost four times higher than Pacific: Figure VII. of course. Singapore. Indeed. Malaysia. accounting for over half the total outflows from developing Asia. the value of M&As as a percentage of FDI flows into developing Asia is very low if compared with that in developed countries (figure VII. The stock of outward FDI from the region reached $289 billion in 1997. Taiwan Province of China and. based on the UNCTAD FDI/TNC database and KPMG Corporate Finance database. Outward FDI from Asia and the Pacific increased in 1997 by 9 per cent to $51 billion -an increase of 2 per cent.5). This suggests that the higher the level of development. Asia and the Pacific: the relationship between it was the year before. Hong Kong. the largest being an investment project in oil and gas in Kazakhstan. reflecting industry structure. Outward FDI from Figure VII. Moreover. cr oss-bor der M&As and FDI flo ws. The main home countries of outward-investing firms in the region were eight East and South-East Asian economies (figure VII. Cross-bor der M&As as a percenta g e of Cross-bor oss-border percenta centag West Asia was positive in 1997. the stronger the Source : UNCTAD. be expected to assume particular importance as firms respond to the restructuring taking place in the economies most affected by the financial crisis (section B). it does cross-bor oss-border flows.5. Significant increases occurred in the 1997 outflows from China. China has ranked among the top five outward investors in the world since 1993. Hong Kong. China. stronger technology-based competition and the need not only to exploit but to acquire created assets. Philippines and Thailand. Indonesia (figure VII.5 per cent. from inflows. 1996-1997 (Percentage) negative outflows in 1996. 206 . 1991-1997 (Billions of dollars and percentage) not seem very high when the trend in the share over several years in the 1990s is considered: in 1994. based on the UNCTAD FDI/TNC database and role of M&As as a market-entry KPMG Corporate Finance database. Note: the five most affected economies are Indonesia. in particular. the share of M&As in total FDI inflows was 11.6). was by far the largest outward investor. Indonesia’s increased outflows were largely the result of a few large M&As that took place during the first half of the year. although it was still lower than its levels in 1994 and 1995. Republic of Korea.6). accounting for over four-fifths of the total outward stock from developing countries.4. M&As can. vehicle.

slowed their pace of outward FDI because of the financial difficulties and structural problems confronting them. Malaysia and Singapore tend increasingly to resort to M&As. Singapore also remained an active investor in Source : UNCTAD. with a total value of over $2 billion. although firms from China. firms from a Ranked on the basis of the magnitude of FDI outflows in 1997. China.Chapter VII seeking investments. Greenfield investments remain the preferred mode of entry for most Asian TNCs. to China and the integration of the two economies. 1997. Notably. 207 . partly offset by a considerable reduction of outflows from Malaysia. Firms from the Republic of Korea in particular have either scaled down or postponed a large number of their planned investment projects in North America and Europe. the current financial crisis is likely to dampen both FDI flows into and outflows from the region in the short term. The growth of outward FDI on the part of Asian economies was. the extent of the dampening being determined by the speed with which the impact of the crisis is overcome. with large Pacific: outflows from Figure VII. Singapore entered into a number of M&As. affected directly by the crisis. *** Looking ahead. China also increased its FDI significantly in South Africa. Asian investors are also among the most important in the lower-income and least developed Asian economies. with outflows to these regions decreasing by 69 and 37 per cent. For the most part. however.Thailand and the Republic of Korea.6. Transnational corporations from these economies. China remained an attractive location for investment by Chinese firms. FDI/TNC database. Asia and the Pacific: FDI outflo ws fr om the top 15 investment projects in forest flows from economies a in 1997 and flo ws fr om the same economies in 1996 development in New Zealand and oil exploitation in Kazakhstan. China. in the crisis-affected countries of the region in the second half of 1997. absorbing nearly two-thirds of the total outflows in 1997. as bilateral relations between the two countries improved. Investment in the territory was further facilitated by the reversion of Hong Kong. The next section analyses this impact in greater detail. Hong Kong. with China continuing to be the single largest recipient of outward FDI from developing Asian economies and especially from Hong Kong. Asia’s outward FDI remains within the region. so that Chinese firms found it progressively easier to establish a foothold in the territory as a springboard for outward expansion. respectively (section B).

taken together. Indonesia.5 billion to $0. Philippines and Thailand. It has involved.7) although they slowed considerably during the first quarter of 1998 when compared to the first quarter of 1997. Philippines and Thailand (figure VII. Republic of Korea. chapter III) and may contribute to the emergence of bubbles (UNCTAD. turmoil erupted in the financial markets of some countries in East and South-East Asia. networks of suppliers. ESCAP. in contrast. FDI inflows in 1997 to the five most affected countries. portfolio investments can cause flows. FDI stocks are generally not footloose. among other things. 1997a. 1998). 1997a).1.7. created assets and competitiveness-enhancing efficiencies (chapter IV). FDI flows involve not only financial capital but also technological.5 billion.5 billion. Estimates. fell by only 13 per cent in 1995. is motivated primarily by a search for immediate financial gain and the time horizon for many bank lending decisions is also short term. Because of their volatility. The flows are motivated by the strategic interests of TNCs that invest in host countries in their search for markets. Much portfolio investment. 1998. FDI flo ws. Unlike FDI. 1998f.Tr World Investment Report 1998: Trends and Determinants B. managerial and intellectual capital that jointly represents a stock of assets for the production of goods and services. However. Source : a b UNCTAD. its mobility is limited by such factors as physical assets. with portfolio equity investment falling by almost 90 per cent. UNCTAD. Indeed. FDI/TNC database and Institute of International Finance. the local infrastructure. Since FDI is mainly a real investment in firms. especially for developing countries. This short-term orientation may make these investment flows quite volatile at times (box I. on the other hand. Malaysia. a 1994-1997 the real sector since such investments are a (Billions of dollars) significant source of productive resources. The crisis that ensued has affected the economies of the region in a number of ways (UNCTAD. while large amounts of short-term capital left these countries. Republic of Korea.1). reflecting the investor ’s lasting interest in these affiliates and control over them.7). Net private foreign bank lending and portfolio equity investment were estimated to have turned negative in 1997 for the group of countries most affected by the crisis: Indonesia. 208 . human capital and the institutional environment. from $4. The financial crisis in Asia and FDI In the second half of 1997. from $12 billion in 1994 to $7. portfolio investment is fully mobile at low cost. foreign por tf olio equity drastic disruptions in private capital flows flows foreign flo ws and f oreign bank lending to the during crises which may then spill over into affected by Asian countries most aff ected by the financial crisis. which had more than doubled in 1994. resources. Malaysia. The behaviour of these two types of investment flows to the Asian economies most affected by the crisis is reminiscent of their behaviour during the crisis that struck Mexico in 1994-1995: total portfolio investment to Mexico fell by nearly 40 per cent. remained at a level similar to that of 1996 (figure VII. primarily on account of a steep fall in flows to Indonesia (table VII. 4 FDI flows. They typically involve long-term relationships at the level of production between investors and their foreign affiliates. a sharp decrease in private external capital flows to some developing countries in the region. FDI inflows remained positive and continued to add to the existing FDI stock. foreign portf tfolio Figure VII. This is not surprising.

It then proceeds to discuss the implications of the crisis for outward FDI from the countries of the region and inward FDI to developing economies not directly affected by the crisis. 1995a. in the short and medium term.Chapter VII Even though FDI is more stable than portfolio investment. at least in the short and medium term. In particular. Implications for FDI into the most affected economies The most important locational determinants of FDI are the economic factors determining the prospects for TNCs to engage profitably in production activities (chapter IV). of establishing and expanding production facilities in these countries. inward FDI provides a useful supplement to domestic investment. It also accounts for a considerable share of exports in some industries (UNCTAD. affected 1. they have built up fundamental strengths that make for long-term growth. and the ease of doing business in a country. All of these factors can be expected to remain favourable.some in a manner conducive to attracting more FDI and others in a manner less favourable. In conclusion. chapter IV). with the ratio of inward FDI flows to gross fixed capital formation ranging from about 5 per cent in Thailand to 12 per cent in Malaysia (figure VII. the friendliness of the policy framework. This is a relevant question because FDI plays an important role in the growth and development of Asian economies. the financial crisis and its economic consequences will affect FDI flows to these countries. They have also substantially liberalized their FDI policies and taken steps to facilitate business. in particular. first. it is not insensitive to crises and especially to changes in the determinants of investment induced by a crisis (chapter IV). Nevertheless. such as high domestic savings rates and skilled and flexible human resources. The Asian countries most affected by the crisis have ranked high among developing host countries in the attractiveness of their economies to foreign investors. The decrease is the result of exchange- 209 . Maintaining and increasing the level of FDI flows to and within the region could therefore assist in the process of economic recovery in the region. This section considers. it considers the possible overall impact of the crisis on FDI flows to Asian host countries in the short and medium term and the longterm FDI prospects of developing Asia. there is an inducement for TNCs to invest in a country. The extent and nature of any FDI will depend upon the precise combination of the economic opportunities available. thereby creating opportunities for FDI that is competitiveness-enhancing for TNCs.5). the implications of the crisis for inward FDI into the five most affected economies in the region in the short and medium term on account of a number of changes resulting from the crisis. Among other things. If these factors are favourable. to and from the most seriously affected economies. provided that the country’s policy framework allows them to do so. for all firms. This raises the question of what the effects of the crisis are likely to be on FDI flows to and from Asia and.2 and annex table B. because they are likely to influence some of the determinants of FDI -. Effects (a) Effects on FDI entry and expansion One reason why inflows of FDI to the crisis-affected countries could be expected to increase in the short and medium term is the decrease in the costs. The eruption of the financial crisis in East and South-East Asia has in fact changed a number of major FDI determinants. including those most affected by the crisis.

For example.2). substantial increases were evident only in the case of the Republic of Korea (figure VII.1 965 Malaysia 55.4 -49. lower hanges affected Jul uly February c hang es in the most aff ected economies. so far. Source : Ortiz. Currenc y depreciation. 1998.8).Februar y 1998 property prices and more (Percentage) company assets offered for sale. given the heavy Depreciation of the indebtedness of domestic currency vis-à-vis Change in the share Change in the dollar price index interest rates firms and their reduced Country (Per cent) (Per cent) (Basis points) a access to liquidity. as the crisis unfolded. 210 . the value of M&As as a percentage of FDI flows into the five most affected countries was relatively low as compared to that for Latin America.2). The currency devaluations that have occurred in the affected countries (table VII.4 -58.plunged (table VII. the current situation presents a unique opportunity to do so at lower than anticipated costs. In Thailand.7 2 398 presence in the region or Korea. have reduced the foreign currency costs of acquiring fixed assets such as land.Tr World Investment Report 1998: Trends and Determinants able Currency Tab le VII.VII. buildings and capital goods manufactured locally. including firms that might otherwise go bankrupt. no clear trend towards an increase in the total value of cross-border M&As in the five crisis-stricken countries taken together is discernible.VII. stock market prices -. provide opportunities for TNCs to undertake direct investments in the region through M&As involving host country firms. Indeed. for firms already planning to invest or expand their investments in Asia. However. Moreover. according to preliminary data. but higher than that for Asia as a whole (figure VII. There is some evidence that this may be taking place: in Thailand. Companies wishing to establish a Indonesia 231. the re-structuring of firms faced with large debt repayments and rising interest rates (table VII.4 -25 may see in the crisis an opportunity for doing so.2) and their urgent need for funds.2. foreign firms require much smaller resources in home country currencies to establish new production capacities or add to existing ones. combined with lower stock prices and a more liberal policy towards M&As. for example. quickly. for example. Overall. a number of large M&As have already taken place in the five most affected countries since the turmoil began (annex table A.0 -63. falling valuations of many Asian firms in the aftermath of the financial crisis have reduced the costs of acquiring firms.5 Indeed. a especially if they react 100 basis points are equivalent to 1 per cent. as well as the lowered property prices. As a result. fall in share prices and interest rate rate depreciations. led by firms from the United States and Singapore during the second half of 1997 (figure VII.1 -48.6 among individual host countries. there were large increases in actual FDI flows into a number of industries (annex table A. In addition. FDI flows into financial services tripled in 1997 in comparison with 1996 and flows in the first quarter of 1998 alone are 30 per cent higher than total flows in 1997 (annex table A.4 373 seeking to increase the scale Philippines 51.5).2).2 of their existing operations Thailand 87. Republic of 83.VII. J ul y 1997 .a rough measure of the price of acquisitions -.0 -81. before recovery starts and the prices of assets and other productive resources rise again.9).1).1) during the second half of 1997 and the first quarter of 1998.

Chapter VII Naturally.is often a sensitive issue in developed as well as developing countries. for example. are therefore viewed cautiously in a number of countries. loss of national control over (first 1997-1998 (fir st half) enterprises. Malaysia. foreign control of large portions of any industry -. in particular.7 Such advantages are particularly relevant for export-oriented foreign affiliates. Philippines and Thailand.4). as otherwise the prospects for a long-term partnership between foreign investors and host countries through FDI could be affected adversely. particularly when M&As seem like “fire sales” (Krugman. 1997-1998 efficiency-seeking mobile foreign (Millions of dollars) investors might find it advantageous to invest in the affected economies. Source : data provided by KPMG Corporate Finance. Philippines and Thailand. Still.9. Cr oss border M&A pur c hases in the five Asian countries growing concerns over the affected by by economy most aff ected b y the financial crisis. 1998). Sensitivities in this respect must be appreciated. Malaysia. As wages and other operating costs decrease in terms of Cross border Figure VII. since they improve their international competitiveness vis-à-vis firms located in other countries that have not devalued. (box VII. Republic of Korea. Cross bor der M&A sales in the five Asian countries foreign currency values. a by host countr y. much depends on the specific circumstances and on the available alternatives. Republic of Korea. which Source : data provided by KPMG Corporate Finance. oriented industries as electrical 211 .3). FDI in such exporta Indonesia. Data for the first half of 1998 are preliminary. especially as (Millions of dollars) there has been a noticeable increase in the value of M&As in which foreign firms acquired majority shares (figure VII. a may include bankruptcy Indonesia. Although M&As are generally regarded as less desirable than greenfield investments.8 In Thailand. affected by by country most aff ected b y the financial crisis. concerns are understandable. there are Cross border purc Figure VII. Data for the first half of 1998 are preliminary.8. a b y selected home economy. even though inflation might eventually eliminate the advantage.or even small portions of key industries -. Export-oriented FDI Currency devaluations can increase the attractiveness of the affected Asian economies to foreign investors by lowering the costs of production. Effects (b) Effects on TNC operations i. In any case. Hostile takeovers.

if a TNC turns an acquired firm into a successful unit as part of its corporate network. For this reason. international M&As are also a phenomenon increasingly associated with the privatization of state enterprises and with the sales of bankrupt or near-bankrupt business units in various regions. greenfield FDI is more desirable than M&A FDI. Hence. however. since the former immediately and directly adds to the existing industrial capacity in host countries. and greenfield FDI is normally preferred by host countries for this reason. assuming that no viable domestic investment will take place in the absence of such FDI. both physical and human. Furthermore. In general. as is usually the case with privatized state properties in developing countries and Central and Eastern Europe) or induce other related investments (perhaps other related FDI undertaken by suppliers). In contrast. other things being equal. including Asia.. it immediately adds to the stock of capital in the host country. 1997a). In fact. the M&A may have been instrumental in maintaining or revitalizing a host country’s capital formation. by definition. M&As would have no such positive employment effect in the short run. investment in new productive facilities. if the acquired firm would otherwise have gone bankrupt. The immediate effect is merely an asset transfer from a host country owner to a foreign TNC. Furthermore. however. This may be true as far as the immediate impact is concerned. There is. /. along with greenfield investments. employment may rise. 212 . Viewed from a host country’s standpoint. 3. assets that enable foreign TNCs to stay competitive relative to host country firms in the latter ’s own backyard. But the acquirer may carry out modernization and capacity expansion (perhaps as a condition of the deal. Employment and the tax base Just as with capital accumulation. M&As may not lead to capital formation in the short run. of course. New incremental or supplementary capital formation may then eventually occur in the form of both sequential and associated FDI which is larger than the original purchase (UNCTAD. These two types of inward FDI are often compared in their desirability for host countries. Greenfield projects are thus likely to result in new capital formation. whereas the latter merely transfers ownership of local assets from domestic to foreign interests. The corporate motivations for M&A deals vary and so do the effects of cross-border M&As for countries. M&As and greenfield investment: a comparison Cross-border M&As have been on the rise for some time. in their eagerness to create employment opportunities and expand the tax base. thereby decreasing the capital stock involved.. there are a host of possible long-term effects that also need to be taken into account in evaluating the relative merits of these two kinds of FDI. In the long run. Although they are concentrated in the United States and Western Europe. it is necessarily accompanied by the transfer of foreign TNCs’ intangible assets such as technology and managerial skills. cross-border M&As are one form of FDI inflows. which are internalized/ embodied in their greenfield projects. host governments are generally more interested in attracting greenfield FDI than in seeing existing local firms sold off to foreign TNCs. accounting for about half the global FDI inflows in 1997. 1995a). job reduction may ensue if an acquisition involves a troubled highcost firm that needs to be restructured and slimmed down. In addition to this short-term capital stock effect. • base. The private and public costs and benefits of cross-border M&As can also diverge significantly. It is argued that. • formation.Tr World Investment Report 1998: Trends and Determinants Box VII. Capital formation Greenfield FDI is. the tax base is likely to expand more favourably under greenfield FDI than through M&As for the very reason that new business units are created by the former as additional taxable entities. greenfield FDI immediately creates new jobs (assuming again the absence of credible domestic investment). It is thus no surprise that special incentives are often given to greenfield FDI. the danger that the acquisition may have been undertaken for the sole purpose of eliminating competition by eventually closing down the acquired firm (UNCTAD.

• resources. the sales of local businesses to foreign firms can become important. Liquidity is usually a priority for any country that experiences a balance-of-payments crisis and is in dire need of foreign exchange. Competition. considerations. For example. FDI is desirable in part because it may bring new assets (e.g. it is conceivable that an acquired firm will end up contributing as much or more to the local tax base. injection). they may have an opportunity to move into new fields. unless the acquired firm itself later diversifies. thereby contributing to industrial diversification in the local economy. the intra-corporate supplementing of local assets with /. industrial knowledge) in new fields. Similar considerations apply with respect to national sentiment and culture. local competition will be revitalized as well. technology) have military applications and can thus damage national security if they fall into foreign hands. production and marketing techniques that are lacking in host countries. if a new owner revitalizes a moribund local firm. however. Greenfield FDI does not directly pose this problem but some greenfield ventures may be aimed at monitoring local technological progress. this “foreign reserves” rationale hardly exists. they are not likely to help a host economy diversify into new industrial activities. • • • 213 . resulting in lower prices for consumers. they can maintain the level of competition that prevailed before.g. obviously. if the acquiring firm were part of a small number of firms at the global level. although the chances of structural diversification are probably greater in greenfield FDI than in M&As. In some developing countries. For example. M&As are also often motivated by the desire to capture synergies by combining sets of corporate assets between the deal-making parties. if the acquired firms might have gone out of business in the absence of a deal. The new owners of local firms may apply new techniques to make their acquired businesses profitable. precisely because both the governments and the local firms are desperately in need of liquidity. Besides.Chapter VII (Box VII. Liquidity (new capital injection) FDI is often welcomed because it brings liquidity. Competition Market competition is desirable because it stimulates and improves efficiency. If the acquired units become integrated with the foreign TNCs’ corporate systems..3. Political and cultural considerations Since M&As involve the transfer of ownership of a local productive activity and assets. Partial M&A deals may also occur to secure a minimum level of liquidity. on the other hand. some countries may consider the broadcasting or film-making industry a cultural industry critical to the preservation of national traditions. founders may want to sell because they wish to retire or some young start-up ventures may reach a point where they need additional capital. depending on whether it might have gone bankrupt in the absence of the acquisition or on the effectiveness with which it handles new infusions of capital and technology under foreign ownership. Supplementary resources Both M&As and greenfield FDI can bring in some critical supplementary resources such as new managerial. whether in the form of foreign exchange at the national level or in the form of needed funds at the company level. In contrast. Structural diversification From a host country’s point of view. greenfield FDI and M&As are equally desirable alternatives. the market power of the new entrant. continued) Nonetheless. the takeover might reduce global competition as well as competition in the host country. and the characteristics of the host countries themselves. greenfield FDI is not an alternative to M&As from the point of view of the individual enterprise. In addition. Here. • diversification. Since M&As mostly involve transfers of existing productive assets. On the other hand. however. while M&As will not generate new competition in the short run. a national security issue arises when local assets (e. In developed countries with flexible exchange rates.. It all depends upon the nature of the industry involved. Only a company-level need for liquidity may arise. there is no guarantee that greenfield FDI necessarily opens up new industrial sectors. Greenfield FDI can enhance local competition if its superior assets/market power are harnessed in such a way as to prevent predatory practices and to attract competitors. In terms of national liquidity considerations.

In such a case. Being part of a TNC system therefore gives affiliates “privileged” access to the TNC system. or switching the output of production from the domestic to the international market. non-performing local businesses. At the individual firm level. Similarly. Synergy-creating M&As certainly add to both the host and home countries’ stock of resources and may bring both public and private benefits. the upshot is an augmentation of the host country’s resource base. In many cases. In fact. which has served as a learning conduit for GM in flexible manufacturing.4). Indeed. They require immediate and direct transfusions of new capital and supplementary resources at the firm level. and to markets located elsewhere (UNCTAD. Source : Ozawa. greenfield FDI is likely to transplant supplementary resources at the national level. TNCs can draw on their international production systems which can serve as channels to reach markets and access inputs. one or the other may be preferable. whether foreign or domestic. In these corporate systems. Depending upon specific circumstances and the policy priorities of host countries. or to affiliates of the same parent firm in other countries. It may even cause a reverse transfer. A prime example of such greenfield FDI is NUMMI (New United Motor Manufacturing Incorporated). which has expanded its operations in Malaysia to serve the European market (box VII. whether privately or publicly owned. simply because they may themselves be short of capital and deficient in technological resources. 9 In making or expanding FDI in export-oriented production. particularly if the new owner ’s intention is to siphon off knowledge from the acquired firm to the new owners. In these cases. a joint venture between GM and Toyota. These units need to be sold off. Hence.1). an M&A may not involve any transfer of new resources from the acquiring foreign firm. the requirement is simply a buyer. since the ownership-specific advantages they internalize are supposed to be superior to their local counterparts if such FDI is to succeed.VII. an M&A results in the draining of resources (e. these existing businesses cannot be purchased and upgraded by domestic firms. A specific example is Seagate. (Box VII. They need transfusions of both new capital and new managerial resources to survive and prosper. This source of gain is important. concluded) foreign assets is a possibility unique to cross-border M&As. In contrast. especially when dealing with distressed. about one-third of world trade consists of such “intra-firm” trade. if not entirely then at least partially. This in turn offers a strong motivation for foreign affiliates to take advantage of the lower costs of production following devaluation. as is the case with some asset-seeking FDI. M&As can enable local firms directly to become parts of transnational corporate systems with a number of competitiveness-enhancing advantages. in the United States. technology) from host countries. 214 . Something very similar had happened in Mexico after the Peso crisis.3).3. when FDI in export-oriented manufacturing and assembly of electrical and electronic equipment more than doubled in 1995 over the previous year (annex table A. The Daimler-Chrysler merger and the VW-Rolls Royce merger are examples. 1996a). a market in itself.VII.g. for they have to be acquired by or merged into other firms if they are to avoid their ever-accumulating losses or debts and eventual demise. foreign firms may be the only possible suitors. *** So which is better from a host country’s point of view? “It all depends” is the appropriate answer.Tr World Investment Report 1998: Trends and Determinants appliances and electronics has risen considerably (annex table A. when it comes to distressed local business units. intermediate goods and tradable services produced by an affiliate in one country are exported to the parent firm. 1998.

press release.drive industry. 1996a). in the case of Japan. 13 December 1998. ranging (for United States majority-owned affiliates) from 14 per cent in the Republic of Korea to 57 per cent in Malaysia and Thailand in 1995 (table VII. Increasingly. although their share of FDI in dollar value is much lower (UNCTAD. the negative effects of the crisis on its Asian operations are not as obvious as the effects of other economic factors. while its revenues in Europe fell. as the single largest exporter in Thailand. TNCs. b As part of the restructuring. reaching 69 per cent and 82 per cent in the case of United States affiliates in Thailand and the Philippines. account for more than a half of the country’s outward FDI in numbers of projects (UNCTAD. with sales in the ASEAN region constituting a major portion. accessing. and experienced currency losses because of the devaluations of the Thai baht and the Malaysian ringgit. the competitiveness of the Clomnel plant was weakened. c The company therefore decided to use the surplus capacity at its plants in Asia to service European markets. Inc. the consolidation of its domestic media operations. Annual Report . Based in the United States. Seagate Technology. Ireland. However. Inc. the Asia-Pacific region contributes about 15-17 per cent of the company’s worldwide sales revenues. Faced with worldwide excess capacity. led by Japanese TNCs. 1998.4. Seagate announced in December 1997 that it would close a plant in Clomnel. TNCs have already had relatively high export propensities in most instances. the emergence of newcomers and intense pricing pressures in the disk. It has also been the engine driving the exports of electronic products from Malaysia and Thailand. technological advances that have intensified competition. is a leading provider of technology and of products for storing. the consolidation of its five disk-drive product design centres in the United States into three. d Source : UNCTAD. Box VII. Foreign affiliates in industries such as electrical machinery have had even higher export propensities in some countries. pp. largely on account of the slump in global computer prices and the consequent cost of restructuring. 1998). 1993b). which had been opened only in 1995. 14 December 1997. laying off 1. The Irish Times . a b c d Seagate. 31-32). To the extent that data for Japanese and United States foreign affiliates in the most affected countries are indicative.Chapter VII Many corporate systems of integrated international production already exist in Asia. 215 . and the downsizing of its worldwide sales and administrative functions. The company reported a loss for the fiscal year 1997/1998. a Its sales revenues in Asia for the first quarter of 1998 remained at a level similar to that in the previous quarter. and closely followed by United States TNCs (UNCTAD. 1998g. aiming at enhancing its competitive position through improvements in productivity and reduction of costs.8 million grant to the Irish authorities. Production costs in Ireland became almost three times those in the affected countries in Asia.3).400 employees and paying back a $15. these also include small and medium-sized firms which. weak demand. Seagate was affected by the Asian financial crisis both in production and sales. its exports accounted for 4 per cent of the country’s GDP during the past few years (TDRI. Seagate. restructuring and the Asian crisis: Seagate Technology. with nearly $7 billion in revenues for its 1997-1998 fiscal year. which account for over four-fifths of its output. which had previously been supplied by the Clomnel plant. and managing information. Seagate restructured its global operations in late 1997. As a result of the devaluation of Asian currencies. The restructuring included the closure of certain manufacturing facilities. Overall. June 1998.10 Technology echnology. the company has the vast majority of its production facilities located in Asia. based on information obtained from various sources. Sunday Times . It also postponed the expansion of its production facilities for a read-write head plant in Springtown in Ireland. Export propensities of United States majority-owned foreign affiliates in manufacturing as a whole have been considerably higher for the five most affected countries as a group (42 per cent in 1995) than for Latin America (26 per cent in 1995).

1 25.0 40.0 Thailand . . 57. as did the fact that foreign automobile affiliates in Mexico were already producing at internationally competitive quality standards.0 All 5 countries . both absolutely and relatively to total production.0 6. Majority-owned foreign affiliates only. and Thailand c combined 76..0 Malaysia .0 19.0 . as could be seen during the Mexican crisis of December 1994-1995. Expor ts as a percentage of total sales.0 46. based on Japan.. expects to increase its exports of motor vehicles.0 . Toyota.0 34.9 Indonesia 79. access to the large North American market in the context of NAFTA and buoyant demand conditions also helped.. The impact of the current crisis could therefore be mitigated somewhat for a number of the most affected Asian countries because international integration at the level of production allows TNCs (and firms linked to them) to compensate for declining domestic sales through increased exports spurred by devaluation. 216 .9 Sector/ industr y Primary Manufacturing Chemicals Electrical machinery Transpor t equipment Ser vices All industries Japanese affiliates in Indonesia.5). a number of foreign affiliates reacted to the slump in domestic demand by switching -.. on the strategies of firms. 1.0 2. 42. 1998.. 2. 40. the extent of the cost advantages enjoyed by export-oriented firms varies among industries and firms and is determined in part by their import-dependence. Data for the Republic of Korea are not available. able Export propensity Tab le VII.0 6. 1.0 69.0 d 8. Malaysia. 1. For example.0 51..1998a.VII.9 18. Survey data for Thailand also indicate plans ) for increased exports by some foreign affiliates (box VII. Moreover.7 8. Department of Commerce. Philippines.0 4. as well as substantially to increase exports of parts and components (box VII.0 4.0 .0 10..3 35.. .sometimes within a few months -.0 .. This further underlines the importance of integrating foreign affiliates into their host economies: such integration not only contributes to the building up of local capacities. Naturally.0 65.6).0 39. but the more foreign affiliates can draw on backward linkages with local enterprises.Tr World Investment Report 1998: Trends and Determinants Being part of TNC networks also makes it easier for firms to switch from domestic sales to exports..a part of their production to foreign markets: exports increased both in absolute terms and as a percentage of total production..0 . The most immediate implications of the currency realignment has been that some TNCs are shifting orders from factories from other countries in the region to their affiliates in the most affected countries.0 . for example. 25.0 Source: a b c d UNCTAD. Honda is shifting some production activities from Japan to its facilities in Thailand (box VII. 27. and United States.0 Philippines . from 58 per cent in 1994 to 86 per cent in 1995 (annex table A.4).0 51. Whether and to what extent this potential is realized depends.0 14.7)..5 70.0 82. 57.0 2. There are signs that some Asian TNCs are also switching some of their sales from domestic to export markets. Ministry of International Trade and Industry.3. of course. Expor t propensity a of Japanese and United States affiliates in the Asian countries most aff ected by the financial crisis. 1995 affected by (Percentage) United States affiliates b Republic of Korea 14. Petroleum only. the less import-dependent they are. In the case of the Mexican automobile industry.

Toyota’s facilities in Thailand include two plants for the assembly of vehicles. Partly for this reason. Car sales continued to decline as expected in Thailand during the first four months of 1998. Altogether. especially for export. Toyota Motor Corporation is helping Toyota Motor Thailand to develop export markets. On 5 November 1997.. 217 . as compared with 15. including diesel engines. Toyota has also taken advantage of the redundant capacity resulting from the crisis to provide a six-month training term at the Japanese headquarters to 50 production-team employees of its Thai affiliate. which is crucial if the local factories are to achieve their minimum production volume of 100. New Zealand. Toyota halted production in two of its Thai plants because of declining demand. which was originally planned for the third quarter of 1998. The expansion of exports is evident in the box table below. including a significant reduction in demand in the local economy and a dramatic depreciation of currency. The changes in production levels and the shares of output for the domestic and export markets during 1997-1998 illustrate how a TNC can respond to rapidly changing economic conditions. which compares projections for 1997 with 1996 levels of exports and production. increasing the latter ’s registered capital to 4.5 billion baht in June 1998. The new plan calls for a temporary halt in the production of the new 1. On 7 January 1998. Total vehicle sales in April 1998 dropped to 11.for instance. and jobs previously done by outside subcontractors. the parent company had to inject an additional capital of 4. it increased inventory of certain parts used in vehicles for export and undertook some additional maintenance of its facilities.200 units in December 1997. Even though the total production of assembled vehicles is expected to decline in 1998 because of the fall in demand within Thailand. Within a few weeks. Toyota’s response to the Asian crisis: changes in production and exports from Thailand. Some workers have been sent to Japan. Malaysia.) Because /. (Toyota Motor Thailand is expected to sell only 60.000 units in 1998 including exports. It also involves reducing the number of employees through an early retirement scheme for factory workers. 1997-1998 Toyota Motor Corporation.Chapter VII Toyota’ oyota’s Box VII. will now be done in-house. Pakistan and Portugal) to which it had already been exporting prior to the crisis. Thailand’s car market is reported to have shrunk by more than 70 per cent since September 1997. in order to improve further the quality and competitiveness of its production in Thailand. The continued slump has forced Toyota to revise its production. while dealers have received a credit extension from Toyota Motor Thailand.600 in 1997 to 4.000 units. engine blocks and camshafts. and plants for the production of components.000 million baht into Toyota Motor Thailand. In addition. The capital increase also allows Toyota Leasing to provide financing support for car buyers. Toyota Motor Thailand has accepted price increases ranging from 6 per cent to 20 per cent and is providing preshipment payments. increased production capacity in Thailand in the 1990s. it began exporting diesel engines to Japan from Thailand for the first time. however. and the value of exports of components was expected to increase from about $50 million in 1997 to about $96 million in 1998. one of the first TNCs to establish operations in the automotive industry of Thailand. The company then began to expand the volume of exports of assembled vehicles and parts to some countries (Indonesia. Toyota is also postponing indefinitely a model change for its pick-up trucks.8 litre Corolla launched in January 1998 because sales (less than 400 units per month) do not justify the investment. Laos.. the number of vehicles for export is expected to increase from 1. such as initial quality surveys.000-70. In mid-November. it resumed near-normal production schedules at both of its assembly plants in Thailand. principally to serve the domestic market in that country but also to export to other countries inside and outside the region. To help its parts suppliers survive.5. Toyota announced that it was planning to increase production. During the following few weeks it made small changes in the production processes -. marketing. Further substantial increases in exports of both vehicles and components are expected by the end of 1998. and employment plans once again. mostly pick-up trucks.800 in 1998. production was partly resumed.000 units a year. each producing two of Toyota’s passenger or commercial vehicle models.

and additional information provided to UNCTAD. into how the crisis has affected foreign affiliates. marketing and employment plans so that it becomes leaner and can maintain its competitive edge. b y industr y: sur ve y results Total number of firms responding Revenue increased Revenue reduced (Per cent) a Agriculture and agricultural products Mining metal and ceramics Light industry Metal productions machinery and transport equipment Electronic products and electrical appliances Chemical paper and plastic Services and infrastructure Total 9 15 19 55 59 46 19 222 78 33 53 35 37 52 42 43 11 47 32 40 34 26 37 34 11 20 15 25 29 22 21 23 Remain unchanged Sector/industry Source : a Thailand. Percentage of respondents indicating a particular response.. P roduction and e xpor ts b y To yota Motor Thailand in 1997 and f orecasts f or 1998 Item Assembled vehicles (units) Total production Total exports Total exports as percentage of production Automotive parts and components Exports (million dollars) Diesel engines Engine blocks and camshafts 1997 1998 (forecast) Change (1997-1998) 97 000 1 600 1. affiliates’ Box VII. light industry and chemicals. Implications of the financial crisis for foreign affiliates’ operations: survey results for Thailand An annual survey covering foreign affiliates in all industries in Thailand was conducted by the Thai Board of Investment a in early 1998 to provide insights. while 34 per cent experienced reduced revenues (box table).. machinery and transport equipment faced reduced revenues than in agricultural products.6.0 -37 000 units +3 200 units 47 3 89 7 +$42 million +$4 million Source: Toyota Motor Corporation. metal and ceramics. concluded) of its global production system that includes parts production and vehicle assembly facilities in many countries. Toyota Motor Corporation has used its financial strength to help solve the immediate liquidity problems of Toyota Motor Thailand. 218 . among other things.Tr World Investment Report 1998: Trends and Determinants (Box VII. press release of 8 December 1997. 1997. erformance foreign by industry: surve vey Box tab le .6 60 000 4 800 8. which is in turn expected to revise its production. There is considerable variation among industries: more firms in mining. metal products. Board of Investment. Box table Pr le. Perf ormance of foreign affiliates in Thailand. how firms are responding and how they view future prospects: • In 1997. At the same time. and paper and plastics. /.5. Toyota Motor Corporation is able to shift towards a larger share of exports in its production in Thailand in quick response to the crisis. Box table Perf le. 43 per cent of all respondents enjoyed an increase in revenues. expor by xports forecasts for Box tab le .

• • Thailand. A m o n g o t h e r m e a s u re s . metals and ceramics — 7 per cent. the . Most of them are mediumand large-scale firms. and service and infrastructure — 9 per cent. S e e k i n g n e w e x p o r t m a r k e t s p re s e n t e d another important solution. continued) • Exports of many companies have been increasing in value since 1997. with only 5. packaging and stock. The most important one is cost reduction. Two-thirds of the respondent companies had been operating in Thailand for more than five years. M o re o v e r. Foreign affiliates in Thailand: affiliates changes in export value in terms of dollars survey results (Percentage) a Source : a Thailand. although Thai exports have gained greater price competitiveness thanks to a weaker baht. stable.1 per cent of the respondents reporting such an action. with only 1 per cent of respondents indicating such plans (box figure 2). In the light of the economic recession that has set in following the crisis. 38 per cent still have Box figure 2. The majority (58 per cent) of the respondents were Japanese companies. More firms will resort to currency hedging to protect themselves from baht fluctuation. n e a r l y h a l f t h e respondents reported turning to the use of domestic raw materials in place of imported inputs. Board of Investment. Some laid off employees. Questionnaires were sent to 592 foreign affiliates operating in Thailand. 219 . The trend towards increased exports appears to be gaining momentum in 1998. paper and plastics — 21 per cent. 47 per cent of firms in mining.6. However. Most companies alleviated their crisis-related problems by reducing production costs such as transportation. followed by Taiwanese and United States' investors. electronic products and appliances were at the other end of the spectrum. of which 236 firms (40 per cent) responded. • Box figure 1. machinery and transport equipment — 24 per cent. t h e p e rc e n t a g e o f f i r m s planning to shift production to other countries is quite small. chemicals. Board of Investment. more than half the responding companies do not plan to expand their investments in 1998.Chapter VII (Box VII. T h e (Percentage) industries with the most ambitious investmente x p a n s i o n p l a n s a re e l e c t ro n i c s a n d e l e c t r i c a l a p p l i a n c e s . with 29 per cent of them having more than Bt 1 billion in asset value. metal products. Many firms suffering from the decline in the domestic market have resorted to overseas markets. Investment plans of plans to invest more in Thailand as labour costs and TNCs in Thailand i n v e s t m e n t i n c e n t i v e s re m a i n a t t r a c t i v e . metal and ceramics reduced the number of their employees. electronic products and electrical appliances — 26 per cent. Two-thirds of respondent companies exported more than 20 per cent of their production. • The measures to be taken in the future to deal with the economic crisis are more or less the same as those taken over the past months. The industrial breakdown of the respondents was: agriculture and agricultural products — 4 per cent. fluctuation in the value of the baht has been a major concern among foreign investors (slightly over a half of the respondents). or increased expor ts in 1997 and expected changes in 1998. Finally. Other problems include the decline in domestic demand and the financial liquidity crunch. mining. Over 60 per cent of the respondent companies indicated that exports in dollar value were expected to increase (box figure 1). light industry — 9 per cent. Source: a Percentage of respondents indicating reduced.

Bank Negara. 24 March 1998. Honda Motors of Japan plans to inject 600 million baht into its cash-strapped parts supply subsidiaries in Thailand to boost their capital during the liquidity crunch. This has not only helped the affiliates to deal with their financial problems. Honda’s production facilities in Japan are to cease producing some parts and to transfer the responsibility to its Thai affiliates. The relocation plan envisages the use of existing facilities without new investments. Europe and the Asia-Pacific countries (excluding Japan). but also boosted their parent firms’ equity share in their affiliates at a cheaper price than might have been possible in normal times. 8. stimulated mainly by global demand for semiconductors. a Showa Corp. as illustrated by Honda’s relocation programme. Most of the respondents service their debt in dollars. a The results of the survey are as follows: Financing and financial transactions • A majority of the foreign affiliates surveyed depend on offshore sources of financing. of which Bt 2. accounting for two-thirds of total manufactured exports in 1997 (Malaysia. TNCs’ response to the Asian crisis: the case of Honda in Thailand In the wake of the financial crisis. 1998).Tr World Investment Report 1998: Trends and Determinants Box VII.. Honda has 27 subsidiaries in Thailand. some leading Japanese automobile makers and their parts producers have been injecting capital into their affiliates located in the most affected countries. The plan starts with parts production and then proceeds to car and motorcycle manufacturing. The relocation of parts production.. plans to raise its stake in a joint shock-absorber venture in Thailand from 49 per cent to 53 per cent by doubling the capital of the affiliate. There are currently over 100 sizeable electrical and electronics foreign affiliates in Malaysia. The remainder will be used to purchase those Honda Car Manufacturing (Thailand) shares not fully subscribed by Honda. The crisis has also acted as a catalyst in this restructuring of global production by automobile TNCs. Other measures include increasing local content in its Thai automobile production. Local banks are used mainly for day-to-day local transactions. A survey of foreign affiliates in the industry was carried out by UNCTAD between April and May 1998.. It has been able to increase exports back to Japan and to outside the region. although some Japanese and Asian firms use the ringgit. /. negotiating for a price reduction of completely-knocked-down imported units from its Japanese parent. TNCs’ response to the crisis: the electrical and electronics industry in Malaysia The electrical and electronics industry in Malaysia is dominated by TNCs. The programme is expected to benefit more than 20 parts producers in Thailand in which Honda has a stake. In addition. Box VII. and cutting expenditures. The Nation . The Nation . most of which are parts manufacturers. 1998). b Honda is also working on a plan to boost automotive parts exports from Thailand. It is also the country’s single largest foreign exchange earner. particularly from the United States. Bank Negara. boosting exports and injecting capital into its affiliates are a few of the measures Honda has adopted in response to the financial crisis in Thailand. Source : a b UNCTAD. Furthermore. Honda’s parent company has decided to inject three billion baht into its Thai holding company. with a view to obtaining an understanding of the impact of the crisis on FDI and TNC activities in this key industry. The industry grew by 14 per cent in 1997 (Malaysia..16 billion will be used to double the capital base of its Thai affiliates.7. 24 March 1998. Only onesixth are self-financing from sales and profits. the cheaper baht has accelerated Honda’s restructuring programme to relocate production to Thailand. an automobile parts manufacturer affiliated to Honda Motor Co. • 220 .

the firms surveyed have positive expectations regarding various production parameters. concluded) • The dollar is the currency required to pay for principal inputs. because FDI in the electrical and electronic industry is mostly exportoriented. demand in these markets needs to remain strong enough to absorb additional imports. Half of the respondents see some opportunities to expand Malaysian operations in the wake of the crisis. assembly and testing. Profit repatriations are normally made in ringgit. Hence the devaluation has affected the cost of production. Some of them see the current crisis as an opportunity for expansion.6) industries that are more export-oriented have been less affected by the crisis than other industries. some of the TNCs have more than one plant. Others felt they would remain at the present level. future Expectations of futur e performance • Despite the crisis. partly due to the fact that some of their products target domestic and/or regional markets. which has been absorbing increasing shares of exports from within the region.Chapter VII Survey data suggest also that in Malaysia (box VII. the ups and downs of the global electrical and electronic industry represent more of a challenge than the domestic or subregional economic upheavals such as the one now affecting Malaysia. equally important. The total value of output from these affiliates (about $5. however. Source : a UNCTAD survey.7 billion) comprised a large proportion of the industry in 1997. but the impact does not appear to be significant. (Box VII. Some consumer electronic firms (28 per cent) have adopted a wait-and-see attitude towards the crisis.8.8) and Thailand (box VII. 221 . Since most foreign affiliates export more than a half of their output. In addition. the impact of sourcing through dollar-bought imports has not been critical. one-fifth of the affiliates do not repatriate profits to their parent firm. has been adversely affected by the crisis and by the current economic slowdown in Japan. However. sales and exports will increase in the next three years. however. important preconditions that need to be fulfilled if increased export competitiveness is to be effectively exploited. To sum up. there is some negative impact on the operations of foreign affiliates in the electrical and electronics industry of Malaysia resulting from the economic turmoil. The surveyed companies still have confidence in Malaysia as a destination for FDI and are optimistic about the next three years. improvements in efficiency and marketing are seen as necessary for coping with the crisis. Coping with the crisis • Almost all of the respondents see cost reduction as a priority arising from the crisis. More than 60 per cent expressed the view that production. None of the respondents suggested that they would decline significantly. There are. This is particularly important since demand in the Asian regional market as a whole. be it by export-oriented foreign affiliates or by domestic firms: the principal export markets in other parts of the world need to remain open to exports from the affected Asian countries and. Responses were obtained from 20 major TNCs with manufacturing facilities in the electrical and electronic industry in Malaysia. In the meantime. Most of the TNCs surveyed utilize Malaysia as a base for component manufacturing. • Plans for investment or expansion • None of the foreign affiliates surveyed intended to close down or relocate elsewhere. through dividend payments from the Malaysian affiliate to a parent company.

1998f). Breakdown of responses to the questionnaire by main sector Source : UNCTAD.VII. The survey covered 500 companies. A total of 198 firms responded to the survey.11). and telecommunication. UNCTAD/ICC Box VII. Nevertheless. scaling down or postponement of FDI in the most affected countries and perhaps elsewhere in the region. These included the world’s 100 largest TNCs (not including banking and finance companies) in foreign assets. in certain service industries.10). Domestic-market-oriented FDI The downturn in domestic demand in Asia (annex table A. Reduced demand and slower growth can be expected to lead to some cancelling.9). FDI declined in real estate in Thailand (annex table A.11). These include banking. insurance and other financial services. The impact on domestically-oriented foreign affiliates varies among sectors and industries. This is precisely what has happened in Thailand where FDI in financial services tripled in 1997 and in the first quarter of 1998 alone stood nearly a third higher than the total for 1997 (annex table A. 222 . and 100 additional firms with significant operations in Asia.5) obviously has some adverse consequences for foreign affiliates producing for sale in local and regional markets.1) and is expected to fall significantly in construction and civil engineering in the Republic of Korea (box VII. The aim was to ascertain the companies’ intentions with respect to FDI in the short-to-medium term in East and South-East Asia in the light of the financial crisis and their opinions regarding the long-term prospects for the region as an investment destination. drawn from the list of such corporations published in UNCTAD’s World Investment Report 1997 . 1998. expectations of reduced investment in the East and South-East Asian region in the short and medium term were reported most frequently for services: 18 per cent as compared to 12 per cent overall (box VII. 50 companies that were potential candidates for inclusion in that list. the largest increases in FDI are expected to take place in consulting services (box VII. the world’s 50 largest TNCs (not including banking and finance companies) headquartered in developing countries. for a response rate of 40 per cent. Breakdown of responses to the questionnaire by home region Box figure.Tr World Investment Report 1998: Trends and Determinants ii.VII.9. The UNCTAD/ICC global survey The UNCTAD Secretariat and the International Chamber of Commerce (ICC) jointly conducted a survey of large TNCs in February-March 1998 (UNCTAD and ICC. where the combination of the recent liberalization and the availability of assets for acquisition would suggest an increase in FDI inflows. drawn from the list of such corporations prepared for UNCTAD’s World Investment Report 1997 . FDI could increase.1). The composition of the sample in terms of countries/regions in which the respondents are located (“home regions”) and in terms of economic sectors is contained in the following two box figures: Box figure. 200 companies that were potential candidates for inclusion in that list. According to a survey conducted by UNCTAD and ICC (box VII. Foreign affiliates in the services sector are particularly susceptible to local demand conditions because of the non-tradability of most services.VII. UNCTAD. In the Republic of Korea.

Affiliates producing goods and services that depend mainly on domestic sources of raw materials and intermediate inputs would also be less affected than those relying on imports from countries whose exchange rates have changed little. N o r t h Box figure 1.Chapter VII Among manufacturing industries. The UNCTAD/ICC global survey: implications for FDI in Asia in the short and medium term The findings of the UNCTAD/ICC survey (box VII.9) show that more than one-quarter of the responding firms expect to increase their FDI in East and South-East Asia as a whole in the short-tom e d i u m t e r m ( b o x f i g u re 1 ) . Short and medium-term prospects: American and Japanese firms are close to overall response of companies worldwide this average. in which TNCs figure prominently. Short and medium-term prospects: company intentions by home region of parent company undertake outward FDI (most of which has traditionally gone to other developing countries). is a good example of the impact of the crisis and the range of responses by firms. where considerable capacity UNCTAD/ICC Box VII.c r i s i s l e v e l . as compared to onefifth of service firms and less than one-tenth of primary sector firms (box figure 3). 69 per cent expect to maintain t h e i r i n v e s t m e n t a t t h e p re . foreign affiliates in light industries which produce non-luxury consumer goods are less likely to be affected than affiliates producing durable goods and luxury items. this may well reflect the fact that. Short and medium-term prospects: company intentions by sector Source : UNCTAD/ICC global survey. with over one-third of them providing this response. However.10. they remain committed to the region. The automotive industry. In the case of the developing Asia TNCs. the low proportion may reflect the impaired capacity of some TNCs to Box figure 2. after having l a rg e l y n e g l e c t e d A s i a u n t i l re c e n t l y ( E u ro p e a n C o m m i s s i o n a n d U N C TA D . In the case of European firms. 1996). March 1998 223 . Demand for passenger cars in the most affected economies has declined dramatically (figure VII.10). they are now taking an active interest in this region. Predictably. Box figure 3. while firms from Europe are distinctly above it and those from developing Asia distinctly below it (box figure 2). firms in manufacturing from all re g i o n s h a v e t h e h i g h e s t p ro p o r t i o n o f responses indicating expected expansion of their FDI in Asia.

these industries are Republic of Korea in the light of crisis. The predicted contraction of the economy in general. Furthermore. and the electrical and electronics industries.12 and GM scaled down its investment plans for a plant in Rayong. postponed or even cancelled investment projects in some of these countries. 224 .o r i e n t e d . Volvo scaled down output at its affiliate inThailand by suspending car production in late 1997. However. are likely to discourage growth of FDI in these industries. Prospects for inward FDI in the advanced. Demand in the metals industry.10. conducted jointly by UNCTAD and the Federation of Korean Industries (FKI). FDI in the construction and civil engineering industries is expected to fall substantially. Source : UNCTAD/FKI survey. April 1998. industries in which FDI grew rapidly prior to the crisis.11.presumably because the need for professional advice increases as the full-scale restructuring of domestic corporations begins and firms engage actively in M&As. from Figure VII. the surveyed firms were p e s s i m i s t i c a b o u t t h e p ro s p e c t s f o r F D I i n shipping. and a rapid fall in consumer spending in particular. the consulting industry appears to be the brightest spot for FDI in the light of the financial crisis (box figure) -. Box VII.Tr World Investment Report 1998: Trends and Determinants VII. a n d t h e i r p ro d u c t s a re survey results internationally competitive. April 1998. According to a survey of foreign affiliates in the Republic of Korea. 25 November 1997. had been built up. Prospects for inward FDI in various industries in the Republic of Korea The financial crisis is expected to influence the prospects for FDI in the Republic of Korea differently in different industries. Domestic demand for these products is increasing rapidly and because national t e c h n o l o g i e s i n t h e i n d u s t r y a re re l a t i v e l y Box figure. which produces basic production materials and intermediate goods.11 Mazda closed a joint venture in the same country in July 1998. 1997: e x p o r t . Thailand. Finally. One-third of the 18 respondents from that industry to the UNCTAD/ICC survey indicated that they planned to postpone some of their investment projects and another one-sixth indicated a scaling down. Passeng assenger gro 1997-1998 (Percentage) Source : S t a n d a r d a n d Po o r ' s D R I .11. given the serious stagnation in the real estate market. a s c i t e d i n Financial Times . finance and insurance. and a number of automotive TNCs have scaled down. may also drop p re c i p i t o u s l y d u e t o d e c re a s e d d o m e s t i c investment and demand and lower levels of production. Passeng er car demand gr o wth. Investment in (Points) trading services is also expected to increase as the import and export regulations have been substantially liberalized and will be further streamlined in the future. Other areas expected to attract more FDI are the semiconductor and communication equipment industries. Source : UNCTAD/FKI survey.

VII. b As one of its measures to reduce costs. In Malaysia. engineering plastic parts and packaging. Pantech and Motorola plan to work together to develop Code Division Multiple Access (CDMA) digital cellular telephones. Motorola Malaysia expects to recruit 200 engineers by the year 2000. In addition. for example. Motorola is also planning to relocate its ASEAN regional headquarters to Malaysia. Motorola plans to invest $300 million in the Republic of Korea to expand its operations and set up new partnerships. 1998). These examples illustrate both the risks and opportunities that the crisis entails for firms. and GM and Ford were competing with each other and with domestic firms to acquire Kia.3 million in the first phase of its wastewater recycling project which would be using the latest “membrane technology”. At the same time. a The investment is to be spread over two years. an automobile producer in the Republic of Korea.7). among other products.1). 225 . New Straits Times . Motorola intends actively to develop local suppliers and to provide overall support to them in technology. 15 May 1998. The Asian crisis and its implications for TNCs: the case of Motorola Despite the deterioration of economic conditions in some Asian markets and its negative impact on sales and profits. a Korean electronics firm. In January 1998. repairs and operational requirements for each of its five manufacturing facilities in Malaysia.Chapter VII $750 million to $450 million (a reduction in planned capacity from 100. 24 January 1998. in which the company plan to recycle up to 40 per cent of current water usage from its plants. thus injecting funds to help its financially distressed affiliate as well as increasing its level of control over it (box VII. ibid. or sought to increase. 11 June 1998. Motorola Malaysia is investing RM3. an increase from about 60 per cent expected for 1998. an example of the protective influence that Box VII. Motorola Malaysia expects its annual purchases from its local component suppliers to increase. They show how TNCs can turn adverse effects to their advantage by strategic positioning.12. this is reflected. SUNS: South-North Development Monitor . GM acquired an additional 40 per cent in General Motors Buana. based upon information obtained from the media and Motorola. The company sources from more than 100 local suppliers: various types of components including semiconductor lead frames. New Straits Times . 13 Honda increased its share in Honda Thailand.12).7 and VII. d Source : a b c d UNCTAD. their investment in the most affected countries. precision tooling. Seoul.14 At the aggregate level.7). reaching a total value of RM1 billion in the year 2000. among other things by the acquisition of assets. in the fact that FDI flows into the automobile industry in Thailand remained relatively strong during the second half of 1997 and the first quarter of 1998 (annex table A.000 units to 40. becoming its second largest shareholder with 20 per cent equity. smart cards based on the open systems architecture. in the automobile industry as well as in other industries. Indonesia.000strong workforce in its five manufacturing facilities in Malaysia are expected to be Malaysian nationals. The company also has an R&D centre in Malaysia. TNCs also reacted by reallocating production from elsewhere to affiliates in the most seriously affected countries (box VII. Motorola is holding to its investment plans in Asia. Exports are expected to account for more than 80 per cent of the company’s annual sales by 1999. the same companies sometimes increased. management and training.VII. flexible circuit boards. compared to RM785 million in 1997. is expected to involve a total investment of RM5 million.000 units) and postponed its implementation (TDRI. and 80 to 90 per cent of its 12. the Malaysian silicon valley to develop. It also has another 500 local partners which supply and service the company’s daily factory maintenance.5. Motorola acquired in May 1998 a stake in Pantech. For example. liquid crystal device. Motorola plans to invest RM50 million in the Multimedia Super Corridor. They also show that foreign affiliates are often in a better position than domestic firms to weather difficulties. The project.6) and/or increasing local content (boxes VII. c In the Republic of Korea. switching production into exports (boxes VII.

at the second Asia-Europe Meeting (ASEM) in London in April 1998. in July 1998. 226 . Provide local government with greater autonomy when dealing with certain tax exemptions. Ministry of Finance and Economy. for example. and value-added service industries. Governments in the countries most affected by the crisis have also intensified their efforts to attract FDI both individually and collectively. At the regional level. Repub lic of Korea: major elements of the promotion programme FDI pr omotion programme “urged full and rapid implementation by all ASEM partners of the Trade Facilitation Action Plan and the Investment Promotion According to an announcement on 30 March 1998.. There is a danger.VII.16 10 years. • Expand the range of tax exemptions to include high-tech. • Taken together.. For changes in the regulatory regime. 15 The Asia-Europe following programme will bea implemented in order to encourage FDI in the country: Investment Promotion Action Plan is focused on a number of activities under two broad Provisions of one-stop service headings: investment promotion and investment policies and regulations.6). As a result. these liberalization moves and promotion efforts make the policy determinants of FDI in the most affected countries more favourable for foreign investors. • Korean Trade and Investment Promotion Agency (KOTRA) between and within the two regions include will be given full responsibility for the Republic of Korea’s a virtual exchange network to disseminate relationship with foreign investors. In addition to unilateral measures and measures implemented in pursuit of multilateral commitments (such as. For example.VII. combined with a recognition of the role that FDI can play in restoring growth and development. At the interregional level. the Republic of Korea has introduced an automatic approval system (table VII. For countries. affecting (c) Regulatory changes affecting FDI The shortage of capital..7. Source : a Republic of Korea.4).4. a round table with business leaders and a business-to-business Offering incentives exchange programme. Recent moves by the five most affected countries include opening industries like banking and other financial services to FDI and relaxing rules with respect to ownership. The • Streamline laws and regulations on FDI. the Action Plan .Tr World Investment Report 1998: Trends and Determinants transnational corporate systems can spread over their affiliates. some countries have in recent months further liberalized their FDI regimes (annex table A. those made under the General Agreement on Trade in Services). as well as high-level • Extend the tax concession period from the current 8 years to dialogue on key investment issues. and Thailand has established a unit to assist foreign companies to bring expatriates to work in promoted projects. ASEAN members are implementing their Plan of Action on Cooperation and Promotion of Investment and. all of this helps to alleviate the immediate impact of the crisis. see annex table A. liberalization measures have also been taken in the context of the adjustment programmes linked to the package of financial support from the International Monetary Fund. the heads of the ASEAN investment promotion agencies announced that the framework agreement to establish the ASEAN Investment Area would be submitted to Ministers for adoption late in 1998 (chapter III). is leading to an even more flexible attitude towards FDI in the region. not only for investment but also for financing production operations and trade. leaders able Republic Korea: Tab le VII. information to investors. mode of entry and financing.”. proposed activities to promote investment • Introduce an automatic approval system. 1998.

further impairing their FDI potential. Singapore. the greater proportion of its outward FDI is in China.19 Substantial Developing outward Figure VII. four newcomers on the 500 list were from the most affected economies. With the worsening of the situation at the end of 1997 and the beginning of 1998. valuation losses may have increased.18 in 1997. The region’s TNCs have been financially weakened by the crisis for a number of reasons: • Valuation losses. stock data for 1992 have been included. Asian TNCs that are mainly Asia-oriented face another possible source of loss if they have relied on borrowed funds denominated in dollars. seven were based in developing Asia (and 14 in Japan). 1995/1996 b • Source : a UNCTAD. Like domestic borrowers. with the greatest proportion of such flows going to other countries in the region. FDI/TNC database. moreover. De veloping Asia's a outward FDI stock. Taiwan Province of China. by destination. For the major Asian developing home economies taken together. as compared to the 1996 list. Implications for outward FDI Outward FDI by TNCs headquartered in developing Asia has increased substantially in recent years. 227 . China were not available by destination. there were none and. Thailand. Malaysia.Chapter VII however. Republic of Korea. This applies both to parent firms and their affiliates in affected countries within the region. For India. This could lead to market distortions and intensify incentives competition in the region (UNCTAD. The impact is much more pronounced for Asian TNCs than for investors from other regions. both intraregionally and elsewhere. an additional six firms from that group of countries departed from the list in 1997. several large TNCs from developing Asian economies have experienced considerable losses of the value of their assets. by stock. Higher interest rates in some Asian host countries encouraged dollardenominated borrowing. 2. Debt burden. Such borrowing appeared reasonable as long as various Asian currencies were pegged to the dollar. Data for Hong Kong.17 Of the 25 companies that have fallen the most in their ranking on the 1997 list.11. b China. the stock of FDI located in other developing Asian economies was at least one-half of their total outward FDI (figure VII. as well as current FDI stocks in some cases. Judging from changes in the ranking of Asian companies on the 1997 Financial Times “Global 500 list” of the largest companies in the world.2). Asian parent firms and their foreign affiliates were caught by surprise when the dollar pegs of some Asian currencies proved unsustainable. 1996d). In 1996. since a much higher proportion of Asian TNCs’ assets are located in other Asian countries. India. that countries eager to attract FDI may provide foreign investors incentives that they would not grant under normal circumstances.11). The financial crisis is likely to reduce both the capacities and the incentives of a number of Asian TNCs to undertake FDI. especially since the crisis-affected economies have similar industries and demand structures. The book value of the assets of a number of firms has fallen due to the drastic currency devaluations and the sharp fall of stock prices (see table VII.

the increased cost of foreign operations due to depreciation of domestic currency. 3 August 1998. reflecting in many cases a decline in growth rates or the onset of a recession (annex table A. Includes developing Asia and Japan. As a result. including their capacity to undertake outward FDI. if their financial capabilities and ownership advantages this permitted. Includes data for 12 firms from the Republic of Korea.VII. the crisis has changed some of the parameters that induced some Asian firms to invest abroad in the past.2). The largest Korean conglomerates. a rise in non-performing debt as well as more demanding prudential regulations may further restrict the room for manoeuvre.VII. through reinvestment or in other ways. Pr ofits gr o wth of w orld's lar g est 500 invest or reinvest in those countries. since they do not earn foreign currency. The calculations of efficiency-seeking TNCs depend very much on the devaluation-related movement of production costs at home as against in other Asian countries. their ability to self-finance their operations or to expand further. In particular. especially in Asia. 2 from Taiwan Province of China and 1 from Malaysia. The problems arising from devaluation in servicing dollar-denominated debt tend to be more pronounced for foreign affiliates oriented to local markets. compared to an increase of 25 per cent in the profits of European firms at the other end of the spectrum with respect to profits (figure VII.7) that were high by international standards (UNCTAD. In the case of banks. Consumption has indeed declined in a number of Asian economies. for example. Europe and the United States. TNCs from Asian developing countries seeking national or regional markets have less of an incentive to Profits gro world's larg Figure VII. a general credit crunch) at home. and the difficulty of raising funds abroad due to lowered credit ratings (table VII. On by firms.8). by home region. The result has been a steep decline in profits in 1997. • Reduced profitability.12). the financial capacities of a number of Asian TNCs have been weakened. TNCs headquartered in home countries whose currencies have been significantly devalued (table VII. The impact of these factors is further compounded by high interest rates (and in some cases. Profit data for 1996 for developing Asia are not available. averaging 18 per cent for the 15 companies from developing Asia included in the 1998 Fortune 500 list. may also have decreased.VII. market-seeking TNCs (Percentage) could switch to countries unaffected by the crisis. 1996 and 1997 the other hand.20 The effect is again to impair the ability of the affected firms to finance outward FDI. forthcoming d).2) may find that devaluations have so far • Source : a b c based on For tune .5).12.5).VII. 21 At the same time.Tr World Investment Report 1998: Trends and Determinants borrowing in foreign currencies has therefore aggravated the debt-servicing burden of TNCs with high debt-equity ratios. 228 . had debt-equity ratios (annex table A. to raise funds (annex table A. To the extent that parent firms and affiliates are located in countries that have experienced a decline in demand. at least as far as other parts of Asia are concerned: • To the extent that growth and demand in other Asian countries has declined (annex table A. A shortage of cash has induced a number of Asian firms to divest assets abroad.

In either case. The Government declared that “reverse” investment. which amounted to 7 billion Malaysian ringgit during the first half of 1997. including a substantial decrease in crossborder M&As over the second half of 1997 (figure VII. Outside Asia. the expected declines in FDI from the Republic of Korea are considerably less pronounced. First quarter data for the Republic of Korea and Malaysia suggest that this decline will continue.13.13). 1997-1998 (Billions of dollars) and that reductions in FDI are likely to be particularly large in the four other crisis-stricken economies.24 some two-thirds of the 46 large TNC respondents based in the Republic of Korea indicated that they had either cancelled. The year 1997 witnessed a decline of outward FDI from four of the five most affected countries (annex table A. “will have to be deferred even if these investments are to be financed through foreign borrowing. and from the five most affected countries in particular. based on KPMG Corporate Finance. the Government began to discourage outward (or “reverse”) investment by Malaysian firms. according to a survey conducted by UNCTAD and the Federation of Korean Industries (FKI) in March 1998. investments which have significant linkages with domestic economy and earn foreign exchange will be continued”. A survey conducted by the Export and Import Bank of the Republic of Korea in March 1998 corroborates these findings: 108 of 140 Korean TNCs responding had cancelled or postponed their FDI plans25 and the bank estimated that total outward FDI by Korean TNCs could fall by 60 per cent in 1998.14). FDI outflows from developing Asia in general. (figure VII.23 Furthermore. at least in the short-to-medium term. they could also affect FDI. the Government of Malaysia had encouraged its firms to invest abroad before the crisis (UNCTAD. 229 . the incentive for Asian TNCs to invest abroad and to invest in Asia in particular is weakened. to the extent that they aim at minimizing outflows of capital in general. scaled down or postponed their investment plans (figure VII. policy measures adopted by governments to deal with the crisis could also discourage some outward FDI. can be expected to remain at low levels in the short and perhaps the medium term.Chapter VII reduced the cost differentials between producing at home and producing abroad that it is no longer worthwhile for them to move labour-intensive production abroad in order to be competitive in world markets.14). Source : UNCTAD. However. 22 All in all. After the crisis reached that country. as Asian TNCs’ capacities to sustain existing operations and initiate new FDI projects are weakened. suggesting that Korean firms expect to invest less in Cross border purc by Figure VII. For example.9). In addition to the factors affecting the capacities and incentives of Asian TNCs to invest abroad. so as to maintain liquidity. It was also the case for investment intentions for 1998-1999. 1995a). This was the case for both manufacturing and non-manufacturing firms . Cr oss bor der M&A purc hases b y firms virtually every one of their major headquartered affected by headquar tered in the countries most aff ected b y the investment destinations (figure VII.15) crisis.VII. Some of these measures may not be targeted at outward FDI but. Other measures are specifically FDI-related.

Over the long term. 1998. This is also reflected in the fact that total M&A purchases outside Asia by firms from major outwardinvesting economies among the less affected Asian economies increased in 1997 over 1996 (annex table A.14. 1998. Furthermore. (Percentage) Singapore and Taiwan Province of China) are considered: their performance regarding outward FDI improved slightly in 1997 over 1996 (see section A). surve vey sur ve y responses a of Asia (China. it can be expected that outward FDI from the region (including the crisis-affected economies) will resume its upward trend. TNCs headquar tered in the Repub lic of Korea: belief of the corporate executives hanges investment for c hang es in investment intentions f or 1998-1999 in the light responding to the survey that of the crisis (Points) most of the fundamental determinants of Asian outward FDI can be expected to reassert themselves once the present difficulties have been overcome. especially in mediumtechnology industries. This includes the capacity to adapt technology to the needs of developing economies as well as advantages deriving from R&D activities.10). even though there were a number of M&As by firms from other major developing countries in Asia in the five most affected economies during the first half of 1998 (annex table A. One determinant is marketing and management know-how.Tr World Investment Report 1998: Trends and Determinants The picture looks different when headquartered Figure VII. 230 .10).VII. uncertain.15. especially in the newly industrializing economies. they can be expected to resume their position as leading developing-country Source : UNCTAD/FKI survey. When it comes to the longer term. Another is accumulated technological capacity. Whether this will continue in 1998 is a Percentage of respondents indicating each of the responses shown. the painful lessons of the crisis and the restructuring in its light could strengthen the competitiveness of Asian TNCs. China. TNCs headquar tered in the the less affected major home economies Republic Korea: effects outward Repub lic of Korea: eff ects on outward FDI.VII. indicating that the combination of financial capabilities and economic incentives has remained favourable for them so far. Source : UNCTAD/FKI survey. This reflects the headquartered Republic Korea: Figure VII. Hong Kong.

especially in developing Asia. In particular. Lao People’s Democratic Republic. data are for approved investment flows. FDI/TNC database. These are mainly the countries of East and South-East Asia. countr y of investment. b y region/ • • Developing countries in the region in which any or all country investment. 1979-1997 a fall in FDI. 1995a). Implications for FDI flows into other countries The implications of the financial crisis for inward FDI are not confined to the five most seriously affected countries. Japanese FDI may be affected (box VII. b y region/countr y of investment. 1993-1996 influence FDI Source : UNCTAD.19). China. 3. be it for market-seeking or efficiency-seeking reasons. 231 . Republic of Korea. Viet Nam. The possibility of reduced growth in the non-affected countries in the region. Myanmar) and Central Asia (figures VII.17. FDI flows into countries that receive significant amounts of investment from within the region -. In the first instance. the Asian least developed countries (Bangladesh.could fall. of these factors come into play are likely to experience cumulative flows. could also region/country investment. Data for developing Asia include data for Hong Kong. in particular. in the framework of the “flying-geese” pattern (UNCTAD. FDI/TNC database. although they may well be more cautious and more focused in their internationalization in the future. brought about by the devaluations in the most affected countries.16. Singapore and Taiwan Province of China. making them less attractive as destinations for market-seeking FDI. cum ulative flo ws. Cambodia. this process took place between Japan (and the United States) on the one hand and the newly industrializing Asian countries on the other hand (UNCTAD. there could be broader implications. FDI in Viet Nam.especially from the most affected countries -. At a second stage. To the extent that FDI flows into other developing countries in Asia do decline. flows from developed countries to the less affected Asian developing countries. The reduced export competitiveness of the less affected countries. Other countries. a Source : Note: UNCTAD. including China. The same considerations Figure VII. may also be affected. which makes them less attractive for efficiency-seeking FDI.13). 1995a). since interactive TNCassisted restructuring has been one of the dynamic forces that has assisted Asian development. cum ulative flo ws.16 to VII. Three factors are particularly relevant here: • The reduced capacity of TNCs in the region to invest abroad. cumulative flows. Malaysia. FDI in China. by Figure VII.Chapter VII investors.

Japan or the United States taken singly (European Commission and UNCTAD. if there is a global recession -. Malaysia. although. Note: data are for approved investment. data are for approved investment.5). some TNCs may find sites in other regions more attractive relative to those in Asia for new investment projects in the short-to-medium term. Taiwan Province of China economies has been relatively low (figure VII. such as recession in Japan and slowing down of growth in the United States -. the main sources of FDI to those regions are still Europe and the United States (figures VII.and there are some signs of deflationary tendencies. China. However.19.6). Republic of Korea. Hong South Asia. cumulative flows. and Central and Eastern Europe -. 1993-1996 Source : Note: UNCTAD.26 and Thailand. Countries further away -. region/country investment.5). Singapore. Data for developing Asia include data for China. countries in the region less closely linked.they could be. Survey results suggest that some firms are indeed looking at expansion in Latin America and also in Central and Eastern Europe and Africa in the short-to-medium term (table VII. FDI in Central Asia. this finding should not be interpreted as necessarily indicating an FDI switch to these regions in response to the crisis.27 Similarly. S i n g a p o r e. It might be expected that. including through intraregional FDI. For the major developing host economies. in the light of the crisis. Data for the UNCTAD/ICC survey suggested that FDI to developing Asia include data for China.18. basic FDI determinants are in good shape. P h i l i p p i n e s. could well increase (table VII. to the most affected countries may well gain in relative attractiveness. Republic of Korea.21-23). FDI in Asian LDCs. by Figure VII. Indonesia. FDI originating in other developing Asian economies was at least 40 per cent higher than the share of Europe.5 per cent (European Union) and 4. particularly from the Republic of Korea.20). where FDI from other developing Asian Kong. FDI/TNC database. the United States and the European Union amounted to between 1. cum ulative flo ws.6 per cent (Japan) of total stock in the first half of the by Figure VII.3 per cent (Japan) of total inflows. The current crisis could therefore lead to a slowing down or interruption of the process. cumulative flows. region/countr y of investment. also receiving outward FDI from the newly industrializing economies. if not in the longer term. Indonesia. M a l ay s i a .Tr World Investment Report 1998: Trends and Determinants number of other Asian countries joined in. 232 . Despite some increases in FDI from developing Asian economies. b y region/country investment. China. 1996). 1992-1995 Furthermore. provided that at least some of their Source : UNCTAD. Ta i w a n Province of China and Thailand. Indeed. The following points among others are relevant: • Natural-resource-seeking FDI is largely location-specific and substitution is limited.in Africa. The ability of investors to substitute actual or potential FDI in one host region (or country) with FDI in another depends largely on the type of FDI as well as on the sector or industry concerned. b y 1990s (table VII. the share of the Asian developing countries in FDI in Japan. Latin America and the Caribbean. Hong Kong. region/countr y of investment. FDI/TNC database. cum ulative flo ws.1 per cent (European Union) to 6. and between 0.are unlikely to be touched by the developments in Asia as far as FDI is concerned.

The crisis has meant considerable difficulties for Japanese TNCs. 233 . Japanese TNCs held almost one-third of the inward FDI stock of the Republic of Korea in 1996.8 (1%) 5. 1998a. three-quarters of the Japanese affiliates incurred losses in 1997.5 (4%) Nor th America Total sales: 157 Sales to the region: 145 (93%) • Domestic sales: 139 (89%) • Sales to third countries in the region: 6.2 (4%) 2. In comparison. Japan: destination of sales of Japanese affiliates abroad in manufacturing. transport equipment.8 (4%) Source: Japan. /. their stock has lost value because of devaluations by affected countries.1 (1%) Japan 2.3 (2%) 5. and iron and steel.Chapter VII Box VII. c affiliates Box figure I. the Philippines and Thailand) in the mid-1990s. In the transport industry.7 (2%) Europe Europe Total sales: 78 Sales to the region: 72 (92%) • Domestic sales: 43 (55%) • Sales to third countries in the region: 29 (37%) 0. including the most affected countries. East and South -East Asia Total sales: 130 Sales in the region: 98 (75%) • Domestic sales: 78 (60%) • Sales to third countries in the region: 20 (15%) 24 (18%) 3. a When it comes to the adverse effects of depressed demand on the profitability of foreign affiliates focusing on local markets. MITI. and Japan is in turn important for Asia. table 2-21-6). Ministry of International Trade and Industry. and about one-quarter of it in the ASEAN 4 (Indonesia. b The future prospects of local market-oriented FDI in Asia from Japan depend critically on how fast East and South-East Asia overcomes the crisis.. 1996)..3 (2%) 1. the European Union held around 15 per cent and the United States 13 per cent of the inward stock of the ASEAN 4. it is relevant to note that local market-oriented FDI is fairly important for Japanese affiliates in Asia. The critical industries for Japanese foreign affiliates are chemicals. in which the proportion of local sales is particularly high (Japan. is an important host region for Japanese TNCs (European Commission and UNCTAD. and they too have dollardenominated debt to service.4 (4%) 2. 1995 (Billions of dollars and percentage) South. 1998a. for example. East and South-East Asia in 1995 (box figure 1) and exports to the countries of the region accounted for another 15 per cent. It accounted for 60 per cent of the total sales of these affiliates in South. Malaysia. Impact of the Asian financial crisis on Japanese FDI Japan has a particularly important role in FDI flows into Asia.13. and many of the considerations discussed in relation to Asian developing-country TNCs are also relevant to Japanese TNCs. Like other Asian TNCs. Asia.

MITI. For example. but this does not necessarily mean a switch to other regions. While the liberalization of financial services figures high on the reform agenda in East and South-East Asia.. However. Devaluation-induced cost increases for imported inputs are probably above average for Japanese investors in textiles. may be attracted by the new opportunities in Asia.13. Furthermore. 234 . Efficiency-seeking FDI may also be attracted by falling costs in Asia. The contraction of markets in the affected countries in Asia is thus likely to reduce some market-seeking FDI in the short-to-medium term. exchange-rate developments. d On the other hand. FDI is not a zero-sum game and it need not be assumed that FDI for other regions must involve some withdrawal from Asia. imported inputs accounted for 62 per cent of the total procurements of all Japanese manufacturing affiliates in the ASEAN 4 (Japan. new Japanese FDI may be attracted to developing Asia by the liberalization of FDI regulations in the countries affected by the current crisis. and the potential to switch from production for the local market to production for exports and from foreign sourcing to local sourcing of inputs. as discussed above. • • Thus the extent of a shift of FDI from the crisis-affected countries to other regions is likely to be limited. continued) The effects of the crisis on export-oriented Japanese FDI in South-East Asia are less straightforward. table 2-226). either relatively or absolutely.. all of which had relied upon imported inputs in the range of two-thirds to four-fifths of total procurement in 1995. the competitiveness-enhancing effect stemming from devaluations is dampened by a fairly high dependence on imported inputs: in 1995. an inadequate capital base and more demanding prudential regulations. table 2-21-6). Furthermore. Latecomers to FDI in developing Asia. /. That would depend on how attractive other regions are. financial tension and liquidity constraints in the Japanese economy may put some Japanese investors at a competitive disadvantage in grasping the favourable FDI opportunities in developing Asia. Export-oriented Japanese FDI in the ASEAN 4 may also suffer from depressed demand conditions in Japan. nearly 50 per cent of them also indicated that they expect to increase their investments in (Box VII. from Japan and elsewhere. iron and steel. 1998a. especially in industries in which Japanese foreign affiliates reported a high share of exports to Japan in overall sales.Tr World Investment Report 1998: Trends and Determinants • Asset-seeking FDI. Japanese banks are forced to reduce their engagement in this region because of mounting non-performing debts. precision machinery (44 per cent) and electric machinery (36 per cent) (Japan. The discrepancy between profitable investment opportunities in East and SouthEast Asia and Japan’s chances to compete successfully with bidders from Europe and the United States is probably most pronounced in banking and finance. Finally. Prospects for Japanese FDI in South-East Asia thus depend on a variety of factors: economic recovery in Japan. and electric machinery. Outstanding in this respect in 1995 were fishery and forestry products (65 per cent). sales by export-oriented Japanese affiliates in the textile industry in Thailand increased in 1997 and 85 per cent of the firms are expected to make a profit in 1998. MITI. Indeed. an overwhelming majority (90 per cent) of the UNCTAD/ICC survey respondents who indicated that they expect to increase their investments in Latin America and the Caribbean and in Central and Eastern Europe did not intend to reduce their investments in East and South-East Asia in the short-to-medium term. who had to fight an uphill struggle against well-established competitors may now have a competitive advantage. They also depend on the extent to which such FDI is targeted at non-Asian markets in the future. 1998a. Their market access is facilitated by depressed local asset prices and their liquidity less constrained by the valuation losses ensuing from the devaluations of Asian currencies. Market-seeking FDI depends mainly on the size and income growth of host countries.

Examples abound. 1998 (Percentage) their investments despite the crisis. This survey was conducted by the Research Institute for International Investment and Development. United States affiliates in South. 11.and medium-term investment intentions of the w orld's leading by TNCs in the light of the Asian crisis. Investment plans of Japanese TNCs in the next unchanged. Department of Commerce.t h re e y e a r s . 1998.Chapter VII East and South-East Asia. East and South-East Asia have lower shares of domestic sales (53 per cent in 1994) than in Europe (65 per cent) (United States. in the UNCTAD/ICC survey. Export-Import Bank of Japan. two-thirds of Japanese TNCs stated that their investment plans in the re g i o n re m a i n e d Box figure 2. as well as automobile parts and component firms. only 1 per cent of which indicated an intention to shift investments to other countries (box VII. Nihon Keizai Shimbum . concluded) All in all. however. however. Shor t.13. forthcoming. Sharp. Declines are expected to be most pronounced in Indonesia (56 per cent) and Thailand (53 per cent) (box figure 2). and almost one-fifth affected 1-3 years in the most af fected Asian countries.6). This view is supported by the increasing exports of Japanese affiliates in developing Asia. able Shortinvestment world's Tab le VII. Another survey undertaken in mid-1998 indicates that between 44 per cent (Indonesia) and 75 per cent (Philippines) of Japanese TNCs in the countries affected by the crisis expected to maintain or increase their FDI in t h e n e x t o n e . by host region (Percentage) a Item Increase No change Reduce No answer East and South-East Asia 23 55 11 10 UNCTAD/ICC global survey. These shares. compared to of them even intended to increase the FDI level in 1997. all plan to increase exports from their affiliates in Asia. Japanese TNCs seem to be responsive to the changing environment in South-East Asia and some of them could turn the recent events to their advantage. (Box VII. 1997c). p. 235 . Hino Motors. In other words. firms see profitable investment opportunities across the spectrum of developing countries and do not necessarily see these countries as alternatives to one another. e Furthermore. f Source : a b UNCTAD. Matsushita. Similarly. c d e f Based on UNCTAD. taken together. 20 April 1998 and 5 May 1998. see Tejima.t o . ibid. Nihon Keizai Shimbum .5. 1998. 16 December 1997. in the mid-1998. were somewhat lower. than the corresponding shares for Japanese affiliates in Europe and North America. base. South Asia 18 61 5 16 Latin America and the Caribbean 37 47 2 14 Central and Eastern Europe 27 52 2 18 Africa 11 62 3 24 Source : a Percentage of respondents indicating a particular response. This is also confirmed by survey responses of foreign affiliates in Thailand. FDI/TNC dataSource : Tejima.

1993-1996 Source : UNCTAD. Asia’s share in the total FDI going to all developing countries would decline in any case.21. by Figure VII. 1993-1996 Figure VII. the relative FDI position Asia attained during the past decade is being readjusted as Latin America and the Caribbean emerge from their “lost decade” and Central and Eastern Europe open their economies. Thus a shift would occur even without any interregional diversion of FDI flows on account of the crisis. S i n g a p o r e . FDI in Latin America and by source region/country the Caribbean. it needs to be recognized that. FDI in Africa. FDI in South Asia b y region/country investment. Hong Kong. by sour ce region/country investment. FDI/TNC database and national sources.Tr World Investment Report 1998: Trends and Determinants Indeed. in any event. In other words. cumulative flows. by source Figure VII.22. Central and Eastern Eur ope . is a Note: data are for approved investment. with or without a crisis. cum ulated flo ws. FDI flows to Latin America and the Caribbean and to Central and Eastern Europe already showed a subst a n t i a l u p w a rd trend before the Asian crisis (chapters VIII and IX). cumulated flows. Republic of much potential for Ko r e a . The extent to which the financial crisis spills over into the real sector and the way it is handled will determine how it affects the size and nature of TNCs’ operations in the region.7). M a l ay s i a . Conclusions It is difficult to assess the overall impact of the different factors here discussed on FDI inflows in the short and medium term into the countries most affected by the crisis (table VII. Source : UNCTAD. Source : U N C TA D. of investment. region/countr y of investment. as other regions improved their FDI appeal. Province of China and Thailand. the characteristics of the host countries in that region and in Asia are so different from those of Asian host countries that there is little direct competition between the two regions (chapter VI). investment. Ta i w a n further increases. Europe ope. cum ulated flo ws. Figure VII. There is a growing consensus that economic growth will slow in 1998 and perhaps also in 1999. 1993-1996 Finally. Data region which offers for developing Asia include data for China.20. cumulated flows. cumulated flows. source region/country b y sour ce region/countr y of investment. cum ulative flo ws. cum ulated flo ws.23. Central and Eastern Europe. As regards Africa. region/countr y of investment. 1993-1996 4. F D I / T N C d a t a b a s e a n d national sources. but there is far less agreement over how much it will fall and how quickly the affected economies will recover Source : UNCTAD. 236 . FDI/TNC database and national sources. Indonesia. FDI/TNC database. b y source region/countr y investment. China.

1990s (Percentage) Flows 1983-1990 1990-1995 0. The crisis also creates opportunities for FDI. since the competitive strengths of firms headquartered in the region remain unchanged and 237 . and promotional efforts have been e On approval/notification basis.3 4.6 1.6. c 1990-1994. UNCTAD. declining during recessions and rising as recovery gathers speed. be variations among countries depending on the speed and thoroughness with which they master the crisis and restore macroeconomic stability. although FDI stock does not fall as a rule and foreign affiliate output and employment show less cyclical variation than FDI flows (Ramstetter. including the five most affected countries. The rationale for taking the second view would be that the economic fundamentals of the region remain sound and attractive for FDI. f Only Hong Kong. Much will depend upon how quickly the efforts to stabilize the financial markets and external financing positions of the crisis-affected economies are broadly successful. China plus 1991-1995 flows from South. The share of Asian de veloping countries in FDI in Japan. of course. especially to deal with the short.3 6. substantial infrastructure capacity and access to regional markets.and medium-term effects (box VII. If flows are maintained or increased. even if modestly. There will.to medium-term to the region as a whole. business facilitation has been strengthened d 1994.Chapter VII (International Monetary Fund.4 c 0. 1997d. The same determinants are crucial for the long-term prospects for FDI flows to Asian countries. as regards the economic determinants of investment. specifically for efficiency-seeking and asset-seeking FDI in the form of devaluation-driven cost advantages and cheaper and more easily available assets. even from the most affected countries. crisis. have become even more so. They might even consider divesting. quite open and hospitable to FDI prior to the a 1990-1993. FDI. Further policy measures and g 1990 stock from Hong Kong. Second. If they take a positive view. China. access resources and improve efficiency. In brief.5 b Economy European Union When it comes to FDI determinants United States 0. especially as far as market-seeking FDI is concerned. they would position themselves in the region strategically. If they take a negative view. promotional efforts could be considered. East and South-East Asia. many of them remain attractive. 1997b. they would see the crisis as an opportunity for competitiveness-enhancing FDI. like domestic investment. the size of host country markets is bound to contract in countries affected by the crisis and thus discourage some market-oriented investments in the short term.9 1. Japan e f f 3. by strengthening their portfolio of locational assets to service markets. they will be reluctant to invest. that would contribute to counteracting. These include high domestic savings rates. 1998a). the expected fall in income and employment and would help in the process of recovery. the United States and European the Eur opean Union. and cautious in acquiring assets in the region.14). skilled and flexible human resources. 1998). First. accelerated.6 g regulatory frameworks.3 d proper.0 4. The extent to which the three sets of FDI determinants mentioned above translate into actual FDI inflows depends upon the longer-term views TNCs take of the future of the region. able developing Tab le VII.7 2. b 1993.1 a Stock 1985 1995 0. is pro-cyclical. which were already Source: UNCTAD. Third. The combination of these factors should allow for cautious optimism about FDI flows in the short. This includes flows from Asian TNCs.1 0.

especially by larger firms.lower supply of foreign capital by banks and portfolio investors.Lower costs and prices. . Note: ‘+’ and ‘-’ signs indicate possible increase or decrease in FDI. the majority of the respondents expressed their confidence in the long-term prospects of those economies as profitable destinations for FDI. some controls on capital flows Discourages outward FDI (-) Source: UNCTAD. . Implications for inward FDI Encourages all kinds of FDI with locally-sourced assets/inputs for establishment/expansion (+) Encourages export-oriented FDI and efficiency-seeking FDI (+) Implications for outward FDI Discourages outward FDI due to: . due to exit of some domestic or other firms adversely affected by capital/ liquidity constraints (+) Reduces availability of and increases costs for foreign firms to raise funds in host-country markets.6).Higher costs in home country currency to support existing foreign operations (-) Discourages domestic or regional market oriented FDI (-) Could discourage some intraregional outward FDI (-) Exchange rate GDP (market size) Asset prices Lower costs for entry.Tr World Investment Report 1998: Trends and Determinants they can be expected to resume their outward FDI once financial strength is restored. Summar y of eff ects of the crisis and possib le implications for FDI in the shor t and from affected by medium term in and from countries aff ected b y the crisis Host-country variable affected Changes related to/ resulting from the crisis Large depreciation of currencies leading to: .8). affecting FDI by some (especially smaller) firms adversely (-) Increases opportunities for FDI through M&As by foreign firms (+) Discourages outward FDI due to difficulties in financing new investments and difficulties in financing existing operations (-) FDI policy changes Further liberalization of inward Creates opportunities for new FDI (+) FDI policy.26). and (especially) crossborder M&As (+) Reduces financial capacities of some foreign affiliates.interest-rate increases. Similar findings emerge from surveys of foreign affiliates in Thailand (box VII. In each case.tightened monetary policy. The pattern of the findings in this regard is similar across firms in different sectors (figure VII. 238 .Higher costs in home country currency to finance new investments (-) .7. in terms of currencies of home and third countries with stable exchange rates. the Republic of Korea28 and Malaysia’s electrical and electronics industries (box VII. able Summary effects possible for short Tab le VII. encouraging greenfield. Even if these positive expectations may have become more cautious since the surveys were conducted in the first half of 1998.25) and from different home regions (figure VII. Depreciation of foreign currency value of assets in existing affiliates.heavy debt burden. The great majority (over four-fifths) of the respondents reported that their confidence in the region as an investment destination had remained unchanged (figure VII.24). Expectations of a continued growth of FDI flows to Asia in the long run are supported by the findings of the UNCTAD/ICC Survey (box VII. with adverse effects on reinvestment (-) Supply of capital/finance Lower supply due to: . . they reflect the fact that Asia remains an attractive region despite the crisis.9). . Reduced rate of GDP growth. leading to reduction of or slower expansion of demand/market size Drastic decline of asset prices.Lower home-currency costs of establishing or expanding affiliates for TNCs from countries with stable exchange rates. Creates opportunities for FDI generally.

14.and medium-term enterprises (UNCTAD. Some specific measures that might be considered in this context include the following: • Governments of the affected countries could make an extra effort . Countries that are hosts to foreign affiliates of Asia-based TNCs in financial distress could consider temporary measures of assistance to help sustain existing affiliates. Special attention might be given to industries whose prospects remain (or have become) particularly attractive. such efforts would have to be embedded in more general policies aimed at restoring macroeconomic stability and economic performance. a number of them -. 1998g) as investors. Home country political-risk-insurance programmes for investors could consider expanding their coverage of foreign affiliates to sudden. Home countries whose tax policies allow the use of optional reserves and grant tax deductions for the depreciated value of their firms’ foreign affiliates could consider recognizing the present circumstances in Asian countries as meeting the criteria for such reserves and deductions. policy measures to encourage them deserve attention.that have depended heavily on outward investments from some of the crisis-stricken countries.such as the ASEAN Investment Area -.to provide information about greenfield and joint venture investment opportunities. 239 .perhaps helped by regional and international institutions . Within the framework of regional integration arrangements and other fora for international cooperation -. These enterprises are even more likely than large TNCs to generate early beneficial effects. but adapted to the special present circumstances in the post-investment stage. they might become Box VII. • • • • • • Naturally. such as improvements in the trade balance. Indeed. Where appropriate. much more will depend on the quality of those more general policies. Vietnam. especially in activities they consider as priority areas. joint venture operations and the transfer of appropriate technologies (UNCTAD. Countries might pay greater attention to providing assistance to dynamic and innovative smalland medium-sized enterprises which are also transnationalizing and the role of which as potential partners in international networks and technology alliances would thus be enhanced. Attractive opportunities could also be highlighted in component or other supplier sectors that are often less visible to foreign investors than final-goods manufactures. such as those in which costs are denominated in local currencies while revenues are obtained in hard currencies.Asian countries could formulate joint measures to encourage FDI and its contributions to the economies of member countries. as well as strengthening institutional capacities to advance the process of development. Policy measures Since continued FDI flows could make a useful contribution to restoring economic growth and maintaining export levels in Asian countries affected by the crisis. as well as competed with them for export-oriented FDI. They often face obstacles related to their size and governments need to address these if they wish to attract small.China. Asian TNCs could consider adopting international accounting standards as soon as possible. Care would need to be taken in formulating these measures to avoid introducing undue discrimination against other investors. 1993a). the Asian LDCs and the countries of Central Asia -. the use of local subcontracting. While specific efforts aimed at maintaining and increasing FDI flows can make a contribution to the process of overcoming the impact of the crisis. Effects on FDI to South Asian countries as well as to Asian newly industrializing economies are likely to be modest.Chapter VII As regards the implications of the crisis for Asian countries not directly caught up in the crisis. are likely to receive lower FDI inflows in the short-to-medium term. where this is warranted. steep and debilitating devaluations of foreign currencies. This would be akin to investment incentives for new inward FDI projects.

Source : UNCTAD/ICC global survey. since Asian firms have not yet made significant inroads as investors in countries outside the region. 240 .24. FDI flows to Africa.26. prospects: overall Figure VII. because of favourable economic performance and other changes conducive to FDI. although the possibility of adverse indirect effects cannot be ruled out if a global economic slowdown were to occur. and Central and Eastern Europe had already showed an upward trend independently of the Asian crisis. while there may be no diversion of FDI to those regions because of the crisis. In any event. affect other regions substantially. Long-term prospects: o verall world orldwide response of companies w orld wide Finally. especially from the most affected Asian countries to other regions are also quite limited. Asian countries face increasing competition for FDI.Tr World Investment Report 1998: Trends and Determinants more attractive to foreign investors looking for new locations for investment in the light of reduced scope for expanding FDI in the most affected countries. Long-term pr ospects: company by compan y intentions by sector prospects: company Figure VII. This suggests that. Latin America and the Caribbean. March 1998. the extraregional impact of the crisis will probably be modest. The changing parameters for outward FDI by Asian TNCs are unlikely to Source : UNCTAD/ICC global survey. The likelihood of diversion of non-Asian investors from Asia and. March 1998. March 1998. prospects: Figure VII.25. Long-term prospects: compan y by company intentions by home region of parent compan y Source : UNCTAD/ICC global survey.

Chapter VII Notes 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 “Kazakstan sells 60% of largest oil firm”.) Ibrahim (1997). p. The value of M&A sales in the five most affected countries to cross-border purchasers was $6.). of the Republic of Korea is reported to have sold its affiliate Symbios (acquired from AT&T Corp. and “China buys oil firm in Kazakstan: $4 billion deal aims to bolster supplies”. p. Financial Times. “Financial Times Global 500". 1997a.uk/asema/texts/closing/chairmans. mimeo. “Big three auto makers go shopping for deals in Asia”. The deal was made during the first half of 1997 between the SETDCO Group. compared with 6 per cent in 1997 (ADB.. 1997 (n. Inflation in South-East Asia is estimated to be 13 per cent in 1998. Based on data obtained from SECOFI. 6 June 1997.8 billion in the second half of 1997 and $5. p.. III. 27-28 September 1997. outward FDI from the Republic of Korea during the first quarter of 1998 decreased by 51 per cent as compared to outward FDI over the same 241 . 15.). It is also difficult to ascertain to what extent some of these are distress sales.F.5 billion in the first half of 1997. Financial Times. Financial Times. as a part of its plan to strengthen the ringgit. “Fall out from Asian Turmoil starts to affect multinationals”. International Herald Tribune. leaving race to Ford". Chairperson’s statement at the Second Asia-Europe Meeting. For example. In the specific circumstances mentioned. for $300 million in 1994) in the United States to Adaptec Inc. in European Commission and ASEM. Mexico. Financial Times. 4 March 1998. (Retrieved on 28 July 1998 from http://the star. Asia-Europe Summit Meeting. International Herald Tribune. Based on UNCTAD’s FDI/TNC database and data provided by the World Bank. 1998 (n. However. a price considered low by analysts.7 and III. It is only since the outbreak of the financial crisis that Asian TNCs appear to have adopted strategies to avoid currency risk.d. 22-23 August 1998. Mexico City. “Financial Times Global 500”. “Mazda closes Thai plant”. "GM decides not to bid for Kia. As discussed in chapter V (box V. Economic Ministers’ Meeting. Terms of Reference for the ASEM Investment Experts Group.F. a Silicon valley company. at a price of $775 million. This proposal was recently reiterated by the National Economic Advisory Council of Malaysia.5 billion in the first half of 1998. London. Levels of FDI flows into the most affected countries which are similar to past levels in dollar terms would therefore signal increased interest by TNCs in Asia. Department of Commerce. tables III. 10). especially at unfavourable exchange rates.I). Foreign affiliates of developed and other country firms in the crisis-stricken countries that have also borrowed heavily face less of a problem since their home country currencies have maintained their value vis-à-vis the dollar. “ASEM 2 Statement: The Financial and Economic Situation in Asia”.com.S. a firm may judge it preferable to sell foreign assets than to sell domestic ones. 1998 Star Publications (M) Bhd (No.F. International Herald Tribune. Financial Times.my/archives/neac). and Mangistaumunaigaz in Kazakhstan. the extent of the improvement will depend on how far export-oriented foreign affiliates rely upon imported inputs. 1998. International Herald Tribune.flo. a part of changing corporate strategies.2. (“Asian firms beat retreat from U.8.”.goVII.statement/). 3-4 April 1998 (Internet: http:// asema. “The Asia-Europe Investment Promotion Action Plan”. 3 April 1998. 10894-D). 13 May 1997. (“Measures to strengthen ringgit”. Based on data from United States. 17. 21 January 1998. 14 January 1998. According to preliminary data obtained from the Bank of Korea. which proposed. “to reduce or suspend reverse investment temporarily with the assurance that overseas investment would be allowed when conditions improve”.d. 27 July 1998. $5. London. divestment is a normal occurrence. It is therefore not always easy to determine the reason for a particular divestment. Japan. based in Indonesia. Hyundai Electronics Industries Co. (Data provided by KPMG Corporate Finance). Makuhari.

outward FDI declined from RM1. Firms from the Republic of Korea had planned to invest $4 billion in India between 1997 and 1999 (UNCTAD. No. However. Intraregional FDI in South Asia. As for Malaysia. For example. 242 . Based on the results of the UNCTAD/FKI survey. gained momentum during the mid-1990s.9 billion in the first quarter of 1997 to RM1. Bank Negara. the pace of investment from the Republic of Korea in India started outstripping that of India’s traditionally important trade and investment partners. 1988. That growth momentum may have suffered because of the financial crisis. 4193. in 1996. 16 April 1998. 1997d). A total of 46 firms responded to the survey questionnaires. The survey on the implications of the financial crisis for outward FDI was conducted by the UNCTAD secretariat and the Federation of Korean Industries in March 1998 and covered the 100 largest TNCs headquartered in the Republic of Korea. figures subject to revision). some of which were followed up with interviews. 1998.1 billion in the first quarter of 1998 (Malaysia. Cited in SUNS: South-North Development Monitor.Tr World Investment Report 1998: Trends and Determinants 24 25 26 27 28 period in 1997. the Republic of Korea accounts for 11 per cent of the FDI stock in Romania and 6 per cent of that in Poland. particularly from the Republic of Korea.

Trends Inward foreign direct investment (FDI) in Latin America and the Caribbean was comparatively low between the early 1970s and the early 1990s. Thirty countries received more FDI inflows in 1997 than in 1996 (annex table B.3).1).5 and figure VIII. FDI flows into the region grew more than twice as fast as flows to all other developing countries as a whole. From 1991 onwards. FDI flows to the region accounted for 38 per cent of total flows into all developing countries in 1997 and the increase in inflows accounted for two-thirds of the overall increase in flows into all developing countries. Aruba.Chapter VIII CHAPTER VIII LATIN LATIN AMERICA AND THE CARIBBEAN Trends A. and 5 per cent for the world as a whole. as Latin America began to receive substantial and growing FDI inflows. Saint Vincent and the Grenadines. In 1997 Latin America and the Caribbean attracted a record $56 billion in FDI inflows.2). with ratios for the largest countries ranging from around 7 per cent to over 40 per cent (annex table B. Mexico and Brazil and. In terms of their role in host economies. East and South-East Asia. Among the larger recipients.1). This was largely a consequence of poor economic performance. including thirteen of the top twenty recipients (figure VIII. Even Mexico’s 1994-1995 peso crisis did not discourage foreign direct investors. This compares to ratios of 8 per cent for South. Saint Lucia and Suriname (figure VIII. during 1995-1997. and even declined during a part of the “lost decade” of the 1980s. however. FDI sto